California Corporations

I. INTRODUCTION: THE CORPORATE FORM

A. The Corporation as a Separate Entity (OL I.A.)
1. A corporation is:
separate person under the law

2. Shareholders:
limited liability

3. Board of Directors:
management

4. fficers:
run day to day affairs

!. "ay attention to:
functions of different people playing different roles in the corporations

#. $he ma%or characteristics of a corporation are:
a. free transferability of shares

b. continuous e&istence e'en if s(h dies

c. limited liability of shareholders

d. centrali)ed management * s(h don+t manage corporation, but board of directors run it

B. Foreign Corporations (OL I.B.)
1. Foreign corporation means a corporation with shares, or other business corporation formed under the laws of another
%urisdiction.
C. Types of Business Corporations (OL I.C.)
1. S Corporation vs. C Corporation
a. S corporations ha'e special ta& status, so owners and not business is ta&ed.
b. $he identity of a corporation as an -S .orp/ or -. .orp/ is only rele'ant for federal income ta& purposes. 0t has no
bearing on the general status of the corporation under state law.
2. Pu!ic!y Tra"e" Corporations
a. "ublicly traded corporations are:
traded on the stoc1 e&change, with hundreds of shareholders

3. C!ose!y #e!" Corporations
a. A closely held 2or -pri'ately held/3 corporation is a corporation:
is pri'ately owned, and can ha'e %ust 1 shareholder
II. FORMATION OF THE CORPORATION
A. Artic!es of Incorporation (OL II.A.)
1. A corporation is ordinarily created by the incorporators:
4iling of articles of incorporation

2. Provisions
a. $he articles of incorporation must set forth:
213 5ame of corporation
223 Agent for ser'ice of process
233 5umber of shares authori)ed
b. $he articles of incorporation may also include a:
limited liability for directors and officers

B. By!a$s (OL II.C.)
1. By!a$s are:
constitution of corporation. details of how corporations are run and general rules
2. 6nless specified in the articles, the bylaws must set forth:
when meetings are held, special re7uirements, how many directors, how many officers and their %obs
responsibilities
3. $he bylaws may specify, among other things:
a. the time, place manner of calling, conducting gi'ing notice of shareholder, director meetings
the manner of e&ecution, re'ocation and use of pro&ies
b. 7ualifications, duties, and compensation of directors, time of their annual election, 7uorum re7uirements
for board and committee meetings
4. $he power to alter, amend or repeal the bylaws or adopt new bylaws, sub%ect to repeal or change by the action of the
shareholders, is:
'ote of s(h is re7uired, but often BD can amend or repeal bylaws.

C. Organi%ationa! &eeting (OL II.B.)
1. $he board of directors named in the articles, or the incorporator2s3 if no initial directors were named, must hold an
organi)ational meeting:
at least once a year
2. $he Board of Directors and shareholders must each:

'. Incorporator(s) (OL II.A.)
1. An incorporator is:
person who forms the corporation
2. $his person:
may or may not be a director
E. 'efective Incorporation (OL II.'.)
1. De Jure Corporation
a. A de jure corporation is:
substantial compliance with the rules to become a corporation
2. De Facto Corporation
a. A de facto corporation is:
corporation which has not been properly formed.
b. $hree features of a de facto corporation are:
213 good faith attempt to comply with incorporation statute
223 business had a legal right to incorporate
233 principals of the corporation acted in good faith as a corporation
EXAMPLE:
Sarah an" Sa( have a truc)ing co(pany. They try to for( a corporation* ut their !a$yer "ies +ust prior to
fi!ing the Artic!es of Incorporation. Sa( an" Sarah "on,t rea!i%e the corporation $as never for(e". It is
!i)e!y it $i!! e for(e" a de facto corporation. They hit a!! three re-uire(ents.
c. De facto status:
is going to insulate directors and s(h from liability %ust as if they were a corporation
d. 8owe'er, the de facto doctrine would rarely apply today, because the state must appro'e the articles before they
are filed, and a statement by the Secretary of State of the fact of incorporation is conclusi'e e'idence of
incorporation.
3. Corporation y Estoppe!
a. Absent de jure or de facto status:
9ight still be protected under estoppel doctrine
b. $his arises when:
if creditor treats a business as a corporation, the creditor is estopped from alleging that corporation
was defecti'e and he could get to principals to hold them personally liable
c. $he re7uirements for corporation by estoppel are:
213 D must ha'e held out as a corporation
223 acted as a corporation
233 honest belief that he or other principals were corporation
d. $he estoppel doctrine is not a defense to:
tort claim because person with tort claim would not ha'e notice.
e. 0t generally arises in:
contract claims where prior business relationship e&ists
EXAMPLE:
.onsidering the facts of the pre'ious e&ample, if the company ordered computers from Dell and are unable to pay,
e'en though they are not an actual corporation, they may be protected by both estoppel and de facto status.
8owe'er, if a truc1 dri'er hits a pedestrian and brea1s that person+s legs, the company may be protected by de facto
status but will not be protected by estoppel, because the 'ictim will not ha'e had notice of the truc1ing company
acting li1e a corporation.
4. Ultra Vires
a. $his is when the corporation is:
acting beyond the scope of its authority in the A0 and the action can be en%oined
b. :imited in .alifornia by:
ultra 'ires cannot be raised as a defense by a corporation or shareholder against third parties in'ol'ing any contract
to which corporation is party. $he primary remedy is to hold the responsible persons liable for damages
HYPOTHETICAL
$he articles of incorporation of Bertos .orp. prohibit the corporation from incurring any debt greater than ;1<<,<<<. $he
corporation+s board of directors appro'es the purchase of property worth ;3!<,<<<. 0n connection with Bertos+ application for
a ;1!<,<<< mortgage to finance the property, 4irst 5ational Ban1 re7uests a copy of the corporation+s articles of
incorporation. 0t then appro'es the loan. 9ay Bertos+ shareholders challenge the loan on the grounds that it was ultra vires=
"robably, in .alifornia. >estrictions in the A0 are binding and the s(h can assert the ultra 'ires doctrine pro'ided the loan
has not yet been made. 0f the loan has been made, then contract is protected and loan cannot be en%oined, so corporation
or board of directors can be held liable. But if transaction has been made, ban1 should ha'e 1nown about the limitation.
?ither way s(h would ha'e a claim against the directors on the board who appro'ed the loan
F. Piercing the Corporate .ei! (OL II.F.)
1. A way the s(h can lose limited liability and creditor can pierce the 'eil to get at the pri'ate assets of s(h
2. ?'en if a corporation is properly formed:
$here are rules that need to be followed to establish the corporation as separate from its shareholders
3. @hen it loo1s li1e the corporation is being treated as a shareholder, this:
is a unity of interest, which will raise a red flag
4. $ypically, a court will only pierce the corporate 'eil where:
$here is ris1 of gra'e in%ustice
!. $he re7uirements to pierce the corporate 'eil are:
a. in%ustice
b. unity of interest * not respecting separate e&istence of corporation
#. $herefore, to pierce the corporate 'eil, a plaintiff must pro'e that:
$he s(h controlled the corporation to such an e&tent that there was no separate entity
a. $his is also referred to as:
alterAego
b. Actual fraud:
5o re7uirement for actual fraud.
B. Fai!ure to Co(p!y $ith Corporate For(a!ities
a. 0f a corporation follows formalities: cannot pierce 'eil
b. .ommon compliance failures include:
213 not issuing stoc1
223 not maintaining separate ban1 accounts
233 failure to hold meetings
243 failure to maintain separate corporate and financial records
c. 5ote that since statutory close corporations aren+t re7uired to ha'e meetings, the failure of a statutory close
corporation to obser'e corporate formalities relating to meetings of directors or shareholders in connection with the
management of its affairs:
does not permit piercing the 'eil. But it must be a S$A$6$>0:C .:S?D corporation

D. Ina"e-uate Capita!i%ation
a. @hen a corporation is formed:
it needs to ha'e enough money to operate business
b. Ade7uate capital is not precisely defined, but generally must be sufficient:
for the corporation to meet its needs
c. 0nade7uate capitali)ation alone:
is not enough but not enough money put in corporation is e'idence of ability to pierce the 'eil
d. $here must also be:
sufficient funds to meet debts of corporations as they become due
213 $his will differ:
by nature of business.
E. Susi"iary Corporations
a. A subsidiary is:
stoc1 is held in whole or part by another corporation
1<. Liai!ity
a. 0f the corporate 'eil is pierced:
liability is generally imposed upon the shareholders in'ol'ed in management. "ossibility that it may
be e&tended beyond persons in'ol'ed
b. :iability is for the full amount of the debt, not merely for the amount that would ha'e constituted ade7uate capital.
11. Enterprise Liai!ity
a. BrotherAsister corporation owned by common parent corporations
EXAMPLE:
$hree restaurants owned by a parent company. ?ach of those restaurants may be held liable for the debts of the
others as brother(sister corporations.
b. $his only arises when:
$hose separate corporations ha'e not respected the separation between them
c. $his is less li1e piercing and more li1e:
Agency argument. ?nterprise liability is hori)ontal while piercing the 'eil is a 'ertical argument
12. Further Shareho!"er Liai!ity
a. Shareholders may also be liable:
when they recei'e di'idends they are not entitled to but this is not piercing the 'eil.
HYPOTHETICAL
$he three founders of Blue De'il decide to open a chain of upscale delis, called the Blue De'il Ba1ery .o. 2-Ba1ery/3.
$he founders formally organi)e it as a separate corporation, with all the shares held by Blue De'il .o., 0nc. 2-Blue
De'il/3 as the corporation+s parent. Ba1ery+s officers are employees of Blue De'il. $he rapid e&pansion of the new
chain is funded through loans from Blue De'il to Ba1ery. @hen Blue De'il de'elops a credit issue, to 1eep the
company properly li7uid, Blue De'il recalls its loans from Ba1ery. @ill this action be sufficient to pierce the corporate
'eil of Ba1ery=
$here is an argument here that there was inade7uate capitali)ation by recallable loans so therefore not separate so
there is a ris1 of piercing. But there is no e'idence of how undercapitali)ed the ba1ery was and whether it had
access to other capital from other sources such that the 'eil would not be pierced.

III. PROMOTERS AND PREINCORPORATION TRANSACTIONS
A. Pro(oters (OL III.A.)
1. A pro(oter is:
agent for an unformed corporation.
2. Fenerally, the promoter2s3 will:
causes the corporation to be formed
B. Pro(oters, /e!ationship to the Corporation (OL III.B.)
1. "romoters stand in a fiduciary relationship to:
the corporation and to the people who would buy stoc1 in that corporation. $he promoter has a duty
to the subscribers. $he promoter must disclose material facts about the corporation.
2. 'uty of 'isc!osure
a. 0f there is an independent board of directors and the promoters are the only shareholders:
then these issues are minimi)ed
3. Pro(oter Liai!ity for Breach of Fi"uciary 'uty
a. 0n an action for breach of the promoters+ fiduciary duty, the corporation may either:
213 sued for damages
223 the transaction may be 'oided by the corporation
EXAMPLE:
A corporation* 012* is for(e" to ta)e peop!e on (arina tours. A pro(oter for 012 se!!s a oat to the
corporation for 3455*555. If this price is incre"i!y high an" the fact that it $as so high is un"isc!ose"*
the pro(oter $i!! have vio!ate" his fi"uciary "uty an" that transaction can thus e avoi"e"* or the
pro(oter he!" !ia!e.
C. Pro(oters, /e!ationship $ith Other Pro(oters (OL III.C.)
a. 0f there is more than one promoter of a corporation, the promoters:
owe each other a fiduciary duty since they are %oin 'enturers. can create liability for one another if they are
functioning as partners in setting up corporation
'. Preincorporation Contracts (OL III.'.)
1. $he 7uestion arises as to:
contracts they enter into before the corporation is formed
2. Liai!ity of Pro(oter
a. 6enera! /u!e
213 As a general rule, the promoter is:
personally liable on any contract that he enters into for any corporation that has not
been formed
b. Pro(oter Persona!!y Lia!e
A promoter+s personal liability will continue e'en after the corporation is formed unless there is:
213 agreement that he is not liable
223 only corporation is held as responsible for the contract
c. Pro(oter 7ot Persona!!y Lia!e
213 Some contracts can be characteri)ed as:
not a contract but offer made to a none&istent corporation
223 0n the case of a re'ocable offer that is made to a none&istent corporation, the offer becomes a binding contract
when:
it is adopted by the corporation
233 $he promoter will not be personally liable on the contract, as:
the offer would only become binding when adopted by the corporation
2a3 8owe'er, if there is performance on the contract prior to incorporation:
the promoter will be liable
d. In"e(nification
213 $he promoter may be entitled to indemnification by the corporation, if:
he entered into G in good faith to the e&tent that corporation benefited from the contract

>emember that the liability of a promoter for corporate contracts is not absolute. 0f the intention is clear that the
promoter+s liability is to be limited, the promoter will most li1ely not be responsible for the obligation, regardless of
whether the corporation is e'er created or the contract is subse7uently adopted.
3. Liai!ity of the Corporation
a. As stated abo'e, a corporation:
doesn+t automatically become liable on contract. $hat corporation must assume liability by ratifying(adopting the G

b. 7ovation or A"option
213 Adoption can be e&press or implied.
2a3 E8press a"option9
Ces, we adopt
2b3 I(p!ie" a"option9
@hen corporation accepts and ac1nowledges the benefits of the G
EXAMPLE:
Shipping .ompany ships candy to .andy Store. .andy Store+s promoter made the agreement for this
shipment prior to .andy Store+s formation. .andy Store accepts the shipment and stoc1s the candy on its
shel'es. 0t has become bound to the agreement through implied adoption.
c. Acceptance of Benefits
213 A corporation may become bound to fulfill a contract made in its name and on its behalf in anticipation of its
e&istence by:
Accepting the benefits of the contract
4. Enforce(ent of the Contract
a. "rior to the company+s formation:
promoter is party to the contract and can enforce the contract
b. nce adopted:
either promoter or corporation can enforce the contract
HYPOTHETICAL
5ic1 entered into an agreement to sell a large parcel of property he owned in >oc1land .ounty to Blue De'il .o.,
0nc., for its @est 5yac1 deli and donut location. 5ic1 also represented that he could build the site to meet Blue
De'il+s needs. $he agreement was completed, and 5ic1 signed the contract to build on the land as .onstellation
.ontracting .orp. 2in formation3. $he .onstellation .orp. was formed but refused to build, and ne'er adopted
the contract. Blue De'il .o., 0nc. has sued 5ic1 rather than .onstellation .ontracting .orp. @ill 5ic1 be liable on
the contract=
5ic1 is liable. A promoter+s personal liability will continue e'en after the corporation is formed unless there is
an e&press agreement that he is not liable or some e'idence that only .onstellation could be held liable for the
contract. $here is no e&press no'ation that establishes that he would not be liable and no indication that Blue
De'il was only e&pecting performance from .onstellation, $he best answer is that he would be liable. Also,
.onstellation not liable as it ne'er ratified the contract the contract. 5ic1 will continue to be liable because
there was no e&press no'ation.
?HA9
$0"

E. Suscriptions for Shares (OL III.E.)
1. A person may become a shareholder by:
agreeing to purchase shares
HYPOTHETICAL
Ioe creates a company through which he+ll perform general handyman ser'ices. 8is first client is 9iss Daisy, who agrees to pay
;!,<<< to ha'e her house repainted. Ioe signs the painting contract as the president of 8andy Ioe, 0nc., e'en though he doesn+t
file the articles of incorporation until two wee1s later. .an 9iss Daisy argue that the contract is in'alid and unenforceable, since it
was signed by a corporation that was not yet in e&istence=
5ot li1ely that 9iss Daisy will succeed because this does not seem to be an offer to 8andy Ioe 0nc. but an enforceable contract.
0t is enforceable contract which would ha'e been enforceable against Ioe. 9ss. Daisy would also be bound by the contract and
Ioe can enforce against. 0f Ioe 0nc has adopted the contract, the contracted can be enforced against 9iss Daisy and she would
be estopped from arguing that the contract is not 'alid against Ioe 0nc.
BAR EXAM APPLICATION
Question 1
Applicants were as1ed to analy)e whether >ita and 4red are liable on a fi'eAyear lease entered into with :andlord for
restaurant space for a corporation they wanted to form called ->ita+s Gitchen, 0nc./ $he lease named ->ita+s Gitchen, 0nc. a
corporation in formation/ as a tenant and was signed by >ita and 4red as -"resident/ and -Secretary/ respecti'ely.
After one year, the properly formed corporation failed to ma1e a profit and ceased operations. 0t owes three months of bac1
rent under the lease.
.an :andlord reco'er the unpaid rent from >ita and 4red indi'idually=
Applicants must analy)e the rules related to liability of promoters and corporations for preAincorporation contracts, as well as
possible indemnification from the corporation.
Landlord rights to sue turns on a few issues whether Rita and Fred were promoters. Promoters are agents of unformed
corporations who work to incorporate corporations. A promoter is liable even after formation of corporation unless there is an
express novation of an agreement to the corporation or the contract was to be performed by the corporation. ince Rita and
Fred entered into a lease agreement prior to forming corporation! they are liable as promoters and can be sued for rent unless
the landlord only looked to the corporation for performance or lease makes it clear that Rita and Fred are not personally liable.
"here is an argument here that since landlord accepted rent from Rita#s $itchen! the landlord agreed to a novation to look only
to Rita#s $itchen for payment. %f neither of these elements can be shown! landlord can recover but he has to choose between
suing the promoters or suing the corporation. Although it is not clear whether Rita#s $itchen accepted the lease! at a minimum!
the company paid rent! received benefits of the lease! and thus! implied adoption of the lease. "he likely result is that even
though Rita#s kitchen is liable for rent! Rita and Fred are also liable. "he promoter may be entitled to indemnification by the
corporation! if he entered into $ in good faith to the extent that corporation benefited from the contract. %f there is any money
left in Rita#s kitchen! Rita and fred may be able to seek indemnification. Assuming they followed the proper formalities in the
formation of Rita#s $itchen! there is no cause for piercing the veil.
BAR EXAM APPLICATION
Question 2
Applicants were as1ed to consider issues arising from a preAincorporation contract entered into by an incorporator on behalf of
the corporation. 9olly and >uth were the incorporators and e'entual shareholders of Dryco, 0nc. 9olly entered into a contract
to purchase a dryer from ?7uipment .ompany 2?.3 on behalf of Dryco. ?. was aware that Dryco had not been formed. ?.
deli'ered the dryer one wee1 after Dryco was incorporated. After a year of ma1ing monthly installment payments, Dryco
became insol'ent.
n what theory or theories, if any, can 9olly and(or >uth be held liable for the balance owed to ?.=
Applicants must consider whether 9olly and(or >uth are liable as promoters or as shareholders under the theory of piercing the
corporate 'eil.
Ruth and &olly can be held liable as promoters. As a promoter! &olly would be liable on the contract unless '( made it clear
that &olly would not be liable or looked to only )ryco for performance. "here is an argument here that by delivering dryer to
)ryco! and accepting monthly payments from )ryco! '( agreed to novation to look to )ryco for payment. "his argument will
probably fail as there was no express novation. %f neither of these elements can be shown! '( can recover from &olly.
A corporation can also be bound for preincorporation agreements by accepting benefits of a contract! *uasi+contract! or
accepting assignment. )ryco will be liable because it accepted benefits of the contract &olly had formed with '(. ,ith both
molly and )ryco liable! '( has to decide whether to sue )ryco or &olly. %f &olly is sued! she can seek indemnification from
)ryco if she had entered into a contract with good faith to the extent that corporation benefited from the contract.
(o+promoter liability + %n addition! since &olly and Ruth were co+promoters! Ruth may be liable for promoter if they acted as
-oint venturers or agents of one another. "he issue of whether Ruth is liable as a copromoter turns on whether she acted -ointly
with &olly in forming the contract. ince Ruth did not sign the contract! she may not be held liable.
'ven if &olly prevails in showing novation! they may still be liable if '( can pierce the corporate veil. "his can happen if )ryco
did not follow proper formalities i.e. if )ryco was undercapitali.ed! failed to issue stock! comingled funds! did not have
meetings and there was fraud or in-ustice. /owever! the hypo presents no evidence of this so (ourts may not allow piercing
the corporate veil.
IV. FINANCING THE CORPORATION
A. $hese are of two types: e-uity securities (he!" y shareho!"ers) and "et securities (OL I..B.).
B. 'et Securities
1. Debt securities represent:
9oney that is loaned to corporation and a person holding debt security is a creditor
2. 8olders of debt securities ha'e:
"riority o'er the e7uity security holders i.e. the shareholders, but do not ha'e the right to 'ote
3. $he three ma%or 1inds of debt securities are: debenturesJ bondsJ and notes.
a. 'eentures
213 Debentures:
unsecured loan to the company. 8olders are generally called creditors.
b. Bon"s
213 Bonds:
Secured by a mortgage or security interest in assets of the company. 8olders are secured creditors.

c. 7otes
213 5otes are longAterm debt securities, which may be secured or unsecured. $hey are generally used when
dealing with institutional lenders, and are generally not traded or transferred as bonds and debentures may be.
C. E-uity Securities (OL I..'.)
1. E-uity securities represent:
the capital of the corporation that is at ris1 in the corporation
2. ?7uity security holders ha'e:
no rights to repayment of the amount they in'ested
3. 8owe'er, upon li7uidation, once:
creditors are satisfied, remaining assets go to the e7uity holders, also 1nown as right to residual.
$ypically debt holders ha'e less at ris1 than e7uity holders.
4. Shareholders usually ha'e:
a. di'idend rights * right to a di'idend, if any declared, at the board+s discretion
b. li7uidation rights * right to share of the corporate assets at the end of the corporation+s e&istence
c. s(h ha'e 'oting rights * right to elect management
!. Co((on Stoc)
a. @hen there is only one class of stoc1, it is called:
common stoc1, which is stoc1 that has no preference o'er any other shares
#. Preferre" Stoc)
a. Preferre" stoc)ho!"ers are shares other than common shares.
b. "referred shareholders ha'e:
>ights that are somewhat senior or preferable to common stoc1holders
213 $hese may include:
2a3 better li7uidation preference
2b3 if there are di'idends, right to di'idend before any is paid to common stoc1 holders
e. Cu(u!ative 'ivi"en"s
213 $he right of preferred stoc1holders to recei'e di'idends may be cu(u!ative or noncu(u!ative
223 Cu(u!ative
2a3 0f the di'idend preference is cu(u!ative:
the preferred shareholders ha'e the right to recei'e the stated amount each year, whether or not
earnings are sufficient to pay it. and no di'idends may be paid to common stoc1 holders until all
cumulated preferred di'idends are paid.
233 7oncu(u!ative
2a3 0f the preferred di'idend right is noncu(u!ative:
the shareholder is entitled to a di'idend when and if the board declares it
'. Issuance of Shares (OL I..E.)
1. Authority
a. A corporation is empowered to issue:
the number of shares authori)ed by its articles of incorporation
b. Any unissue" stoc1 may be authori)ed:
213 by 'ote of stoc1holders or
223 'ote of board of directors under authority of bylaws or 'ote of stoc1holders
EXAMPLE:
B!ue 'evi! Co.* Inc.* has 4*555 shares authori%e" in its certificate of incorporation. Each of the three
shareho!"ers is issue" 455 shares* !eaving :55 shares authori%e" ut not issue". On!y the ;55 shares can vote
or receive "ivi"en"s. The other :55 shares are avai!a!e for future so!icitation.
HYPOTHETICAL
Figobyte .orp.+s articles of incorporation authori)e 1,<<< shares of common stoc1, all of which ha'e been issued
already. $he company wants to raise additional capital by issuing a new class of preferred stoc1. $he preferred shares
would ha'e no 'oting rights, but would recei'e priority distribution of di'idends. 9ay the corporation issue the preferred
stoc1 without the appro'al of its e&isting shareholders=
5o. $he articles of incorporation must be amended to create a new preferred class of stoc1 that would recei'e priority
distribution of di'idends. $his re7uires appro'al of e&isting shareholders.
HYPOTHETICAL
Blue De'il .o., 0nc., has 1,<<< shares at ;1< par authori)ed in its certificate of incorporation. "occo is gi'en the shares
for wor1 done for the corporation both prior to and after it was incorporated, "ierre is gi'en shares for a promissory note,
and "eter is gi'en shares for his promise to wor1 for free for the corporation for a month. Are the shares issued
properly= @hat is the board of directors re7uired to do=
"ar 'alue shares may not be issued for consideration worth less than the par 'alue. $he par 'alue here is ;1< per
share. Kalid consideration for shares may be money, property recei'ed by corporation, ser'ices performed for the
corporation. "occo is fine as long as the wor1 he performed for the corporation is e7ual to 'alue of the number of
shares he recei'es. "ierre has a more difficult situation * a promissory note for future payment is not 'alid
consideration in .alifornia unless it comes with security. Similarly, for "eter, future wor1 is not 'alid consideration.
$his is different from rules in partnerships in ::.s

2. Consi"eration for Shares
a. Par va!ue means the absolute least amount for which one share of stoc1 could be sold. $he money recei'ed from
the issuance of par 'alue stoc1 is called:
stated capital. 0t needs to be sold for more than <
b. 7o<par shares ha'e no minimum, but must sell for o'er )ero.
c. .a!i" Consi"eration
213 Kalid consideration for shares may be:
2a3 9oney
2b3 "roperty
2c3 Ser'ices
223 5ote that a promise to perform future ser'ices and a debt or promissory note of the purchaser is unacceptable
as consideration unless secured
3. Stoc) Certificates
a. /e-uire(ents
213 $he face of each certificate must state the:
number of shares and the class and series, if any, that the certificate represents
b. /estrictions
213 Any restriction on the transferability of stoc1 must be noted conspicuously on the share certificate
223 A reference to see the written agreement is 'alidly conspicuous.
E. 'ivi"en"s an" 'istriutions (OL I..F.)
1. A "ivi"en" is:
distribution by a corporation to it shareholders of cash, property or stoc1 of corporation
2. Shareho!"ers, /ights to 'ivi"en"s
a. A shareholder has:
no inherent right to be paid a di'idend since BD has discretion to decide whether and when to declare a di'idend

b. $he directors may 5$ declare a cash di'idend if:
the corporation is insol'ent or if payment of the di'idend would render it insol'ent or a declaration or payment would
contra'ene any restrictions in the articles
c. Ba" Faith /efusa! to 'ec!are 'ivi"en"s
213 $ypically, a board of directors can decide whether or not to declare a di'idend.
223 0f a shareholder can pro'e that the directors+ refusal to declare a di'idend amounted to fraud, bad faith, or an
abuse of discretion, then there may be a claim for the refusal to declare di'idends.
HYPOTHETICAL
$itan "harmaceuticals .orporation %ust ended a 'ery successful year, earning ;4< million in net income after ta&es.
0nstead of declaring a di'idend, howe'er, the board of directors decides to throw all of the money bac1 into the
corporation, to be applied toward further research and de'elopment. 9ay the preferred shareholders demand a di'idend
if the board of directors refuses to issue one=
5o, as long as a BD was fully informed, did not act in bad faith, had no conflict of interest, and did not act in bad faith,
they would be protected under business %udgment rule. Absent contractual rights, s(h ha'e no right to di'idends.

F. /e"e(ption of Shares (OL I..6.)
1. /e"e(ption occurs when:
company has right to force the shareholder to sell the shares bac1 to the company
a. $his right:
must be stated in the articles of incorporation
b. 0t usually applies only to preferred stoc1
6. Shareho!"ers, Pree(ptive /ights (OL I..#.)
1. "reempti'e rights are the rights of e&isting shareholders to:
ac7uire uninsured or treasury shares in the corporation or options or rights in proportion to their current holdings when
the corporation see1s to issue additional stoc1 that would reduce their ownership percentages.
V. MANAGEMENT AND CONTROL
A. 6enera! (OL ..A.)
1. A hierarchy of authority allocates power between:
a. shareholders, who own the corporation
b. directors, who manage the corporation
c. officers, who run the daily operations of a corporation
B. Shareho!"ers (OL ..B.)
1. Shareholders do not ha'e control o'er the day to day management of the corporation * this is reser'ed for officers and
directors
2. Shareholders ha'e the right to:
a. can elect and remo'e directors
b. amend the bylawsJ and
c. appro'e fundamental changes in the corporation, such as amendment of the articles of incorporation
merger, sale of substantially all assets, or dissolution
3. 9anagement may see1:
ratification or appro'al of an action. 0f directors ha'e a conflict of interest
4. Shareholder action on these matters:
is ta1en at a meeting
!. Boards act, shareholders react.
HYPOTHETICAL
Fary is the president of "ubco, a publicly held corporation that publishes children+s boo1s. About a year ago, Fary was
approached by another publishing company, which made a generous offer to purchase "ubco+s educational di'ision.
Because the board of directors had been tal1ing about mo'ing away from publishing educational te&tboo1s, Fary accepts
the offer. 8e mentions the sale to his brother, Andy, who is on "ubco+s board of directors and agrees that it is a good
idea. Shareholders who find out about the sale disagree. 9ay they demand that "ubco rescind the transaction=
Fary as an officer and Andy is a director. Fary is responsible for day to day management of the corporation, and if he
has been gi'en authority under his %ob duties to sell di'isions, then he does not need board appro'al. Shareholders do
not ha'e power in management decisions. 8owe'er, the 7uestion turns on how big the education di'ision is and
whether it is a fundamental change in "ubco+s di'ision such that the sale of the di'ision is a sale of substantially all
assets. 0f not, the shareholders do not ha'e a say in the sale.
#. Shareho!"er &eetings
a. The Annua! &eeting
213 A meeting of shareholders is to be held annually for:
election of directors and the transaction of any other business
b. Specia! &eetings
213 of the shareholders may be called by the president or the directors or ipon the written application of the
holders of 1<L of shares entitled to 'ote.
c. =uoru(
213 $he basic rule is:
unless the articles or bylaws pro'ide otherwise, ma%ority of shares entitled to 'ote at a meeting
is a 7uorum
223 4or shareholders:
present at a meeting at which 7uorum is present, may continue to transact business until
ad%ournment e'en after withdrawal of enough shareholders to lea'e less than 7uorum
233 0n no case may a 7uorum consist of:
less than a third of the shares entitled to 'ote at a meeting
243 A ma%ority consists of:
!< percent plus one.
HYPOTHETICAL
"eaches and Apples .orp. has 1,<<< common stoc1 shareholders. Si& hundred appear at the annual meeting. After a
lunch brea1, only 3<< shareholders return for the remainder of the meeting. 9ay the remaining shareholders of "eaches
and Apples elect new directors after the lunch brea1=
Ces, since 7uorum was met by #<< members 2#<L of ma%ority share holders3, shareholders can continue to transact
business until the meeting is ad%ourned as long as at least a ma%ority of shares re7uired constitute a 7uorum, which
would be 2!1 in this case. 0f 2!1 'ote for the new directors, then they can appro'e. 0f 2!< and less, then no new board
of directors.
B. E!ection an" C!assification of 'irectors
a. Straight .oting
213 0n straight voting:
each share has one 'ote for each director. $hus a ma%ority stoc1holder can elect the
entire board of directors.
223 5ote that:
to ensure representation stoc1 can be classified for purpose of electing directors. But
usually, the ma%ority shareholder wins
b. Staggere" Ter(s
213 0n this scenario, a ma%ority stoc1holder:
always wins
c. Cu(u!ative .oting
213 $his is:
general rule in .alifornia, e&cept for public companies
223 0n cumulati'e 'oting:
number of shares to be 'oted multiplied by number of positions to be elected.
EXAMPLE:
If there are 4*555 shares an" five positions up for e!ection* there $i!! e >*555 votes. If a shareho!"er
has 455 shares* that shareho!"er $ou!" have >55 votes to cast.
233 A shareholder+s 'otes:
A shareholder may use all of his cumulati'e 'otes to elect one or more directors.
243 $his allows minority shareholders to:
pool their 'otes together for certain candidates and ha'e some representation on the board
HYPOTHETICAL
9arsden .o., 0nc.+s bylaws call for three members on the board of directors. Sarah and Sally each 'ote for themsel'es, and
Simon 'otes his share for Iessica, a person with e&tensi'e restaurant e&perience. @ill Simon ha'e the right to ha'e control
o'er the company once Iessica becomes a director=
5o. ?ach of the directors ha'e to act on behalf of all shareholders. 0f Simon does not li1e how Iessica performs, he can
replace her at the ne&t meeting.
D. Pro8y .oting
a. ?'ery shareholder entitled to 'ote:
can do so by pro&y
b. $he term pro8y means:
gi'ing someone else right to 'ote on your behalf
c. 0t may also mean:
an instrument granting the authority
d. $he agent to whom authority is granted is called:
pro&y holder
e. A pro&y is revocable unless:
it is coupled with an interest
213 a pro&y is deemed to be coupled with an interest if the pro&y holder is a :
pledgee
person who has purchased or agreed to purchase the shares
beneficiary of a trust
person designated by or under the shareholder 'oting trust or agreement
creditor or employee of the corporation whose contract pro'ides for the granting of a pro&y
f. &echanics of Pro8ies
213 .alifornia permits an electronic transmission authori)ed by the shareholder in lieu of a signed written
authori)ation
E. Shareho!"er .oting Agree(ents an" .oting Trusts
a. Poo!ing or Shareho!"er .oting Agree(ents
213 to consolidate 'oting power in order to gain or strengthen control of corporate affairs, stoc1holders may
arrange to 'ote their stoc1 collecti'ely. Shareholder 'oting agreements are contracts designed
to ensure that the shareholders will 'ote in concert with regard to issues designated by the agreement.

2a3 0t is ordinarily used by minority shareholders to e&ert some control o'er the company.
EXAMPLE:
:in1letter .o. has 1<< shares of outstanding common stoc1. Iohn owns 4# shares, while Alice, 9i1e, and
Feorge own only 1D shares each. Alice, 9i1e, and Feorge sign a 'oting agreement that re7uires each of
them to 'ote all of their shares as any two of them decide, gi'ing them 'eto powerMthe potential to
out'ote 9i1e.
223 $hese are generally 'alid absent fraud or other illegal ob%ecti'e,
b. .oting Trusts
213 A voting trust in'ol'es a transfer of legal title to the shares to a trustee who 'otes them for a specified period
according to the trust terms.
223 Koting trusts are generally sub%ect to stricter statutory regulation than are 'oting agreements.
233 0n .alifornia, there is a:
a 1<Ayear limit to the duration of a 'oting trust
1<. Shareho!"ers, /ight to Infor(ation
a. Statutory /ight
213 Shareholders ha'e the right to get information about the corporation such as boo1s and records and minutes
of shareholder and director meetings, access to bylaws, obtain annual report of corporation and so on.

C. 'irectors (OL ..C.)
1. Directors:
are the centrali)ed management of a corporation
2. Directors may:
a. Adopt actions or implicitly ratify actions of the officers or agents
b. 8ire officers
3. Directors are charged with:
4iduciary duties
4. Number
a. .alifornia law re7uires:
9inimum of three directors
!. =uoru( of 'irectors (OL ..'.)
a. A -uoru( is:
5umber of directors that ha'e to be present for a board to legally adopt an actionJ and it is ma%ority of directors
b. 6nless otherwise pro'ided in the bylaws:
A ma%ority of the authori)ed number of directors constitutes 7uorum
EXAMPLE:
0f there are fi'e directors on the board, and only three attend a 'alidly called meeting, the 'otes of two directorsMa
ma%ority of those presentMwill constitute a 'alid act of the board N.orp. .ode O 3<BP.
#. 'irector Participation
a. A director cannot:
'ote by pro&y. ?'en if the pro&y holder is another director. 0f he is to 'ote, he must be present at the meeting.
'. Officers
1. fficers are elected or appointed by the board of directors in accordance with the bylaws
2. ne person may hold the offices of president, secretary, and treasurer simultaneously
3. Authority of Corporate Officers
a. fficers act:
with either actual 2e&press or implied3 or apparent authority
b. Apparent Authority
213 Apparent authority of an officer to do an act is based upon a representation by the corporation to
the third party that the officer has the authority to do the act, together with reliance by the third party on the
representation. After such a representation, the corporation is estopped to deny the authority of the officer.
c. /atification
213 Acts of a corporate officer or agent:
that ha'e not been properly authori)ed may be ratified by the board
2a3 >atification occurs:
means it happened after the fact. >atification re7uires full disclosure
223 $o be effecti'e, ratification must occur: after such reasonable and full disclosure of facts of the transaction as
the circumstances reasonably re7uire
233 >atification re7uires:
actual 1nowledge by those indi'iduals whose ratification is claimed
243 >atification may be:
e&plicit by passing a resolution or implied by acceptance of the benefits of the agreement
HYPOTHETICAL
Blue De'il .o., 0nc.+s board of directors appointed "ierre to ser'e as treasurer of the company while Sara, a 'ery
intelligent graduate of 6.:A+s hospitality program, was hired to be president. "ierre decided that it was proper to sell and
lease bac1 all of the deli cases so that the company would ha'e cash for a ma%or e&pansion in .alifornia. Sara agreed
with the plan. @as her action proper=
$his depends on si)e of transaction. 0f the purchasing is in ordinary course of business, then Sara+s actions are proper.
8owe'er, if it re7uires ma%or financing, then it may rise to the le'el of re7uiring board or shareholder appro'al. @e don+t
need to worry about apparent authority because call of 7uestion as1s whether she had actual authority.
BAR EXAM APPLICATION
Question 3
Applicants were as1ed to consider potential problems arising from a shareholder agreement that was entered into by B!
in'estors, fi'e of whom agreed to ser'e on the board of directors of >ita+s Gitchen, 0nc. 6nbe1nownst to the B! in'estors and
their representati'e, >ita and 4red as1ed an attorney to draft a shareholder agreement that would designate >ita and 4red as
permanent directors and officers of the corporation and would set >ita and 4red+s annual salaries at 12.!L of the corporate
earnings.
0s the shareholder agreement 'alid=
Applicants must consider matters related to shareholder agreements of a closelyAheld corporation, and a director+s fiduciary
duties.
From the February 0112 (alifornia 3ar 'xam
hareholder agreements are usually valid and since 24 investors signed it! there is a presumption that it is valid. /owever!
even if agreement is valid! provisions may be unenforceable. ,hile s5h can elect directors through agreement! they can#t
permanently appoint board of directors for life. %t deprives them of right to elect directors. 5h can agree on who to elect but not
on how they may vote since directors have fiduciary duty to all shareholders. Any provision that re*uires board of directors to
vote a certain way will be invalid. Any director who gives up right to vote and follows instructions would be violating duty of
care. %t also appears that the provision to appoint Rita and Fred as permanent 36) with 70.48 earnings is a conflict of interest
and potential violation of duty of loyalty. ince it is not clear that the action was approved by disinterested board of directors! it
can still be cleansed by informed s5h approval. %f the shareholders agreement is deemed as a vote! then it can be seen as
approved. /owever! it is not likely to be a vote and even if! the s5h do not seem to be informed. ince it does not appear
reasonable! the provision or entire agreement is void or voidable as a violation of duty of loyalty.
BAR EXAM APPLICATION
Question 4
Applicants were as1ed to e'aluate the 'alidity of certain corporate actions ta1en by the directors of Sportco, 0nc. 2S03. Alice,
Bob, :arry and .arole are all directors on the se'enAperson board of directors of S0. Bob is also "resident of S0. "rior to
becoming a director, .arole had entered into a 'alid written contract with S0 to sell a parcel of land to S0 for ;!<<,<<< for S0 to
build a retail store. After learning that the land would appreciate in 'alue o'er the ne&t few years because of a planned mall
de'elopment, .arole as1ed :arry, who also performs legal wor1 for S0, for ad'ice on how to get out of the contract with S0.
Based on his suggestion, she as1ed Bob for a release from the contract, which Bob granted orally. At the ne&t board meeting,
attended by Bob, Alice, and :arry, the board passed a resolution ratifying Bob+s oral release of .arole from her contract with
S0.
@as Bob+s oral release of .arole from her contract with S0 effecti'e=
@as the resolution passed by Bob, Alice, and :arry to ratify Bob+s oral release 'alid=
Applicants must e&amine the authority of officers and directors to bind corporations and the corporate formalities re7uired to
ta1e corporate action.
From the 9uly 0114 (alifornia 3ar 'xam
As a director! 3ob cannot release (arole from the contract! but as president! he may have the authority. 'ven though
President usually has power to terminate agreements! given the si.e of the agreement and that it may not have happened in
ordinary course of business! it is likely that 3ob did not have actual! implied or apparent authority to release (arole from the
contract.
"he transaction is a conflict of interest! which should have been disclosed and cleansed by the directors or shareholders.
"ermination of contract may also re*uire a written release under 6F because it involves sale of land. (orporate opportunity
issue here by taking this opportunity for himself! 3ob is violating his duty of loyalty to %.
"here was no *uorum for the ratification since there are seven board of directors and only three of them attended the meeting
where they approved the resolution. Furthermore! Larry was an interested director and he did not disclose his interest. o
release and approval of release is not valid.
VI. FIDUCIARY AND OTHER DUTIES OF MANAGEMENT
AND CONTROLLING SHAREHOLDERS
A. Fi"uciary an" Other 'uties of 'irectors (OL .I.A.)
1. 'uty of Care
a. 0n general, directors, officers, and incorporators must perform their duties:
213 Duty of care * good faith, in best interests of corporations, and with such care of ordinarily prudent person.
223 Duty of loyalty * conflict of interest

233 Declare di'idends

b. Simple negligence:
is not sufficient to breach the duty of care
c. Defenses to breach duty of care A Business ?u"g(ent /u!e
213 Business %udgment rule shields directors from liability and insulates board decisions from re'iew. 0t creates a
rebuttable presumption that directors are honest and wellAmeaning and acting through decisions that are
informed and rationally underta1en in good faith.
223 $he business %udgment rule does not apply in situations in'ol'ing:
2a3 @hen duty of loyalty is at issue 2if there is conflict of interest, loo1 to duty of loyalty3
2b3 A board director will not be insulated by the rule if the decision was illegal, egregious, based on fraud,
in'ol'ed a conflict of interest, made in bad faith or uninformed.
2c3 Does not protect directors or officers when no action is ta1en because no %udgment was made
233 /e!iance on /eports an" E8perts
2a3 A director or officer is entitled to rely upon the %udgment or e&pertise of e&perts pro'ided that:
13 0t is properly presented and
23 0nformation is thorough and reasonable to rely upon
2b3 ?&perts include:
13 .ounsel, public accountants or other persons as to matters that the director or officer reasonable
belie'es to be within that person+s professional or e&pert competence
2c3 $he director or officer is not considered to be acting in good faith if he has 1nowledge concerning the
matter in 7uestion that would cause his reliance to be unwarranted.
243 Shareho!"er /atification
2a3 if a ma%ority of the shareholders ratify the action with full disclosure, the directors cannot be liable
d. Ba" Faith /e-uire(ent
213 "roof of a director+s bad faith is re7uired by a shareholder claiming:
2a3 Bad faith refusal to declare di'idends or other distributions
2b3 Distribution of Assets in Dissolution
2c3 9a1ing an 0mproper :oan or Fuaranty
HYPOTHETICAL
Kan, the .? and shareholder of $ransonion, a large, publicly held corporation, was nearing retirement. 8e met pri'ately with >ich,
and suggested that >ich cause one of the corporations he controlled to enter into a merger with $ransonion at a price of ;!! per
share 2mar1et price was ;3D3. >ich agreed, and ordered his underlings at "erch .orporation to prepare a cashAforAstoc1 merger
agreement between "erch and $ransonion at ;!! per $ransonion share. Kan then called a special meeting of the $ransonion board,
of which he was chairman, and in a 2<Aminute presentation, urged the board to appro'e the proposed $ransonionA"erch merger
without any discussion of the price being fair. $he directors also thought that they could sell it to someone else if a higher bid were
made. @ithout loo1ing to see if the merger agreement had those terms, the board 'oted unanimously to appro'e the proposed
merger after a meeting lasting two hours. @ould the directors be liable=
Ces, they are liable for duty of care because they made an uninformed decision. $hey are not protected by the business
%udgment rule because they rubberstamped instead of in'estigating the merger. 5ote that they ha'e an affirmati'e defense if
they can show that the transaction was fair but here since the directors did not inform themsel'es and did not use duty of care
in e'aluating the transaction, they ha'e 'iolated duty of care to transaction.
2. 'uty of Loya!ty
a. $he fiduciary duty of loyalty re7uires that officers, directors and employees be loyal to the corporation and not
promote their own interests in a manner in%urious to the corporation.
b. ?&amples of this type of conflict of interest include:
213 where officer or director has business dealings with the corporation or other interest in corporate transaction

223 where officer or director ta1es ad'antage of a corporate opportunityJ
233 enters into competition with the corporation
EXAMPLE:
The "irector of &e"co Inc.* a (e"ica! services co(pany* (ust refrain fro( voting on a contract
et$een &e"co an" a (e"ica! e-uip(ent co(pany o$ne" y the "irector,s $ife.
c. Business 'ea!ings $ith the Corporation
213 An interested transaction is one in which:
where director has financial or familial interest
2a3 A direct financial interest could mean a personal profit or profit for a close family member.
2b3 0nterloc1ing directors: occurs when director is on the board of or has a financial interest in
two transacting businesses. $his does not necessarily constitute conflict of interest.
223 $ransactions that in'ol'e a conflict of interest are 'oid or 'oidable by or on behalf of the corporation unless the
interested person can pro'e that:
2a3 material facts about the conflict has been fully disclosed to the boardJ and
2b3 transaction has to be appro'ed by ma%ority of disinterested shareholdersJ and
2c3 the contract should be %ust and reasonable to the corporation when it is appro'ed
or
2d3 material facts about the conflict are disclosed and fully described to the shareholders
2e3 the transaction is appro'ed by a disinterested ma%ority of the shareholders or
or
2f3 a court determines the transaction to be fair
233 $he board of directors may set director compensation pro'ided:
reasonable or ratified by shareholders
>emedy: a corporation may rescind a transaction that is not fair, and damages can be awarded.
d. Corporate Opportunity
213 $he fiduciary duty of loyalty prohibits directors and officers 2and sometimes employees3 from:
ta1ing something for themsel'es that belongs to corporation unless
2a3 it is fully disclosed to corporation
2b3 the corporation is first gi'en the opportunity
2c3 corporation then says it does not want ta1e the opportunity and lets the indi'idual pursue it
223 4actors to determine what constitutes a corporate opportunity include:
2a3 whether the indi'idual became aware of the opportunity while acting in his capacity as director or officer
2b3 whether the business constituting the opportunity closed related to business the corporation
2c3 whether the board ha'e an interest or e&pectancy in the opportunity
2d3 whether the opportunity in the business line of the corporation
2e3 whether corporate funds or facilities were use in disco'ering or de'eloping the opportunity.
0f the opportunity is outside line of business, did not come due to director+s position, and not something
for which business funds were used, then indi'idual can perhaps ta1e ad'antage of the opportunity
without breaching duty of loyalty.
EXAMPLE:
$oyma1er, 0nc. ma1es all 1inds of toys. $he president, 8arry, meets someone selling the rights to a new
lifeli1e doll. 8arry buys the rights and starts a new company to sell these dolls. 8arry has usurped a
corporate opportunity from $oyma1er, 0nc.
EXAMPLE:
Same facts as abo'e, only now someone approaches $oyma1er 0nc+s president with a recipe for a coo1boo1.
$he president buys the recipe and publishes a coo1boo1, something $oyma1er has ne'er done before. $his will
be permitted and there would be no conflict.
233 0f the person presents the opportunity to the corporation and:
if it is re%ected by 'ote or e'en silence(inaction, then it ceases to be an corporate opportunity and
the director can ta1e ad'antage it
243 /e(e"y
2a3 0f a director has usurped a corporate opportunity or entered into competition with the corporation, the
court may:
13 hold the indi'idual liable and ma1e them constructi'e trustee of the corporation
23 this person would ha'e to deli'er any property, income or profits deri'ed through the corporate
opportunity. "erson would also be liable for damages.
2!3 Other 'efenses
2a3 Another defense to a claim of usurpation is:
inability and incapacity.
HYPOTHETICAL
Susan has leased se'eral locations to .ottle 8ill .o., 0nc. She comes to Iac1, who is the president of .ottle 8ill, and as1s if .ottle 8ill
would li1e to buy her properties instead of leasing them. Iac1 thin1s that .ottle 8ill cannot afford the purchase, so he says he will buy
them himself. Does the corporation ha'e a cause of action against Iac1=
4id. Duty of loyalty prohibits officers from ta1ing something for themsel'es that belongs to the corporation unless full
disclosure is made about the opportunity to the board, the board has an opportunity to first re%ect it and allow the indi'idual
to pursue it. 8ere, the properties are ones in which .ottle hill would ha'e had an interest. Iac1 did not present the
opportunity to the board so the corporate opportunity has not been cleansed by a 'ote of the board. Iac1 could argue
fairness but he did not pay anything for the property. Iac1 can also argue defense of inability and incapacity, as the
corporation could not ha'e performed due to financial incapacity. Since we do not ha'e any e'idence about .ottle 8ill+s
financial capacity, Iac1 would hold the property in constructi'e trust for .ottle 8ill and he would be found liable for usurping
the corporate opportunity.
B. 'uties of Contro!!ing Shareho!"ers (OL .I.C.)
1. Fi"uciary 'uties
a. Shareholders:
9a%ority or controlling shareholders ha'e a fiduciary duty to refrain from e&ercising their control to obtain a benefit
from the corporation not shared proportionally with the minority shareholders.
b. .ontrolling shareholders are ones who:
ha'e the ability to ma1e impact on the decisions of the company
c. 9a%ority or controlling shareholders ha'e a fiduciary duty:
an obligation to refrain from e&ercising their control to obtain benefit from corporation that isn+t shared proportionally
with the minority shareholders
213 $his is most commonly seen when:
dominant s(h gets something that minority s(h does not get
EXAMPLE:
A "o(inant shareho!"er uses his inf!uence to have a "ivi"en" issue". The shareho!"er receives
(i!!ions $hi!e the (inority shareho!"ers receive on!y a "o!!ar each. This is per(issi!e if it $as
proportiona!.
d. ?&amples of improper conduct include:
213 causing the directors to guarantee loans made to, or to enter into loans with, a ma%ority shareholder
223 causing the directors to issue additional stoc1 for the purpose of diluting minority+s interest
233 causing the directors to enter into contracts with the ma%ority shareholders or an entity affiliated with him on
unusually fa'orable terms or causing the board of directors to dissol'e the corporation, sell its assets, for
purpose of e&cluding the minority shareholders from participation in profitable business
e. Because of the absence of disinterested parties, cleansing can only occur where:
by showing that the transaction was fair and reasonable. 0f not, it is a 'iolation of duty of loyalty
2. Sa!e of Contro!
a. A shareholder is permitted to obtain a control premium for selling a ma%ority or controlling portion of the stoc1.
b. 8owe'er, where the seller:
1nows the person who the shares are being sold to can hurt the corporation. $his is when the transfer will result in
pre%udice for minority shareholders
c. 5ote the terms -dominant,/ -ma%ority,/ -controlling/ are interchangeable terms.
3. Free%e<Out &ergers
a. A free%e<out merger means that:
minority shareholders are forced to sell their shares and get fro)en out of the corporation. $his may be permissible
for a legitimate business purpose, and usually sub%ect to %udicial re'iew for fairness to the minority shareholders.

213 0n .alifornia, this can be done when someone controls E<L or more of the company.
HYPOTHETICAL
Ste'e, the president and sole shareholder of a closelyAheld mo'ie distribution company, decides to retire and transfer his
shares to Iudy 2his second wife, who is also the company+s chief financial officer3, Ieff 2his son, who wor1s the company+s
cash register and is not related to Iudy3, and "aul 2the company+s 'ice president of sales3. After disco'ering that Ieff has been
ta1ing ;1<< per wee1 from the cash register, Iudy fires Ieff, offering to buy bac1 his stoc1, but not the stoc1 owned by "aul. A
few months later, "aul learns that a competing business is selling all of its assets at a significant discount. After mentioning the
sale briefly to Iudy, "aul establishes a new company and purchases the competitor+s assets. 0n what way did each of the
shareholders most li1ely breach their fiduciary duty to the other shareholders=
Ste'e seems to be in the clear pro'ided he followed federal security laws about transferring shares and there are no s(h
agreements re7uiring him to transfer his shares to someone else. Iudy fires Ieff and it is unclear whether she had the
authority to fire him. @e also need to 1now whether she did it to buy bac1 his stoc1 and get him out of the way, in which
case, she 'iolated fiduciary duty as a s(h. if she did ha'e authority to fire, then she was well within her rights as Ieff was
stealing. Iudy should ha'e disclosed to "aul any material info she had about the stoc1 before she bought it else she may
ha'e 'iolated federal and state security laws. Ieff committed a crime so he 'iolated his fiduciary duty of loyalty to the
company. "aul too1 a corporate opportunity and it is not clear if his disclosure was sufficient. 8e didn+t disclose to the board
but to Iudy, which may not be enough for cleansing his action. 8e may need the board to appro'e his ta1ing of corporate
opportunity for he 'iolated his fiduciary duty of loyalty by ta1ing the corporate opportunity.
C. Fe"era! Securities La$ (OL .I.'.)
1. /u!e 45<>
a. >ule 1<bA! is:
an antiAfraud pro'ision that prohibits false or misleading statements in connection with the purchase or sale of
securities
b. >ule 1<bA! prohibits:
213 the use of any de'ice, scheme or artifice to defraudJ
223 omissions or misstatements of material factJ and
233 any act, practice or course of business that operates as fraud or deceit
c. Actual fraud is not re7uired for a 1<bA! 'iolation.
d. A security means:
any note, stoc1, treasury stoc1, security future, bond, debenture, as well as a 'ariety of other interests
in'ol'ing an in'estment, the return on which is dependent on the efforts of a person other than an in'estor .
e. >ule 1<bA! regulates companies whether or not they are publicly traded.
f. ?uris"iction
213 After finding a security, the ne&t thing to e&amine is %urisdiction.
0t must in'ol'e interstate commerce
223 ?&amples include:
2a3 9ail
2b3 $hings transported across state lines
2c3 0nternet
233 0f a transaction is entirely intraAstate:
then state security laws apply
g. $he e!e(ents of a 1<bA! action are:
&7E&O7IC9 &an, Securities Can &a1e /eal 'amages
213 9isrepresentation or omission of material fact
223 Scienter 2intent to decei'e, manipulate or defraud3or 1nowledge of the misrepresentation or material fact
233 .ausation
243 9ateriality
2!3 >eliance on the plaintiff, generally assumed if the statement(omission was material
2#3 Damages: must ha'e damages
h. Privity is not re7uired, and the defendant need not be a buyer or seller in direct contact with person who made the
misstatement as long as:
his fraud was in connection with the purchase or sale transaction in which plaintiff was a buyer or seller i.e.
someone who chooses not to buy or sell based upon misrepresentation or omission does not ha'e a claim.
EXAMPLE:
0f "resident ma1es a false statement regarding patent appro'al, and Shareholder buys stoc1 from someone else
relying on that, and "resident was lying, Shareholder has a claim against "resident e'en though Shareholder didn+t
purchase the stoc1 directly from "resident.
i. Enforce(ent
213 ?nforcement may be:
enforced by S?., courts and indi'iduals can also sue for a pri'ate cause of action
%. 5ote that in order for there to be a 1<bA! claim:
a plaintiff must ha'e purchased or sold security
EXAMPLE:
Ioan is about to sell her stoc1 in 8ot Air Balloon >ides .orp., but decides against it when the president tells her that
the company is about to sign a big contract with Birthday Balloons 6nlimited. ?'en if the president+s statement was
in 'iolation of >ule 1<bA!, Ioan would ha'e no right to sue him because she didn+t purchase or sell the stoc1. 0f she
bought more stoc1, then she would ha'e claim for additional stoc1 she bought based on false information.
2. Insi"er Tra"ing
a. 1<bA! has been applied to insider trading transactions. 0nsider trading in'ol'es someone who has material inside
information, about the corporation of which he is an insider, that would influence the 'alue of its stoc1. Such a
person is obligated to not ma1e a secret profit by dealing in that stoc1 before public disclosure of the material
information is made.
State laws also regulate fraud in the purchase and sale of securities. @here this arises and the issue is
honesty, mention that there might be common law claims.
b. Insi"ers
213 An insi"er is anyone who:
2a3 learns of material non public information as a conse7uence of corporate position as director or officer >

2b3 has a fiduciary duty to the corporation
223 Anyone who breaches a duty not to use inside information can be held liable under >ule 1<bA!.
233 0nsiders typically include:
directors, officers, controlling shareholders, attorneys, accountants
c. Tippers an" Tippees
213 Tippers are:
insides who ma1e selecti'e disclosures of material inside information in a breach of their fiduciary
duties to someone else, and the tippee trades on it. A tipper can be liable for the profits of their
tippees who trade on that information
223 $he fiduciary duty of the insider is breached when:
the tipper recei'es a benefit, i.e. e'en an enhanced reputation, financial benefit.
233 5ote that information can be passed on without a breach of duty.
EXAMPLE:
An insi"er (ay e a person ta!)ing on a phone in an e!evator $ithout )no$ing that so(eone e!se is in
the e!evator a!so* an" the insi"er ina"vertent!y "isc!oses infor(ation. There is no reach of "uty here*
an" the other person on the e!evator cou!" tra"e on this infor(ation.
EXAMPLE:
A corporate e8ecutive $ho ta!)s in his s!eep an" revea!s infor(ation has not reache" a "uty. The
person $ho overhears the e8ecutive (ay e a!e to tra"e on this infor(ation.
243 $ippees may be liable only if:
tipper breached his duty and the tippee traded on or told others about the material inside
information 1nowing that the tipper acted improperly.
2a3 $he tippee has:
no independent duty to the corporation as deri'ati'eJ a beach by the insider must be shown
?HA9
$0"

2b3 utsiders:
An outsider who de'elops information on their own ha'e no duty
EXAMPLE:
0n the mo'ie -@all Street,/ Budd 4o&& follows a wellA1nown in'estor around town one day, noting who the in'estor
spo1e with, what buildings he entered, etc. 8e came to a conclusion about the in'estor+s intentions, and traded
on that assumption. $his is not inside trading.
3. &isappropriation of Insi"e Infor(ation
a. 6nder the misappropriation theory, a person may be prosecuted by the go'ernment under >ule 1<bA! e'en when
he has no duty to the corporation or shareholder of the corporation when:
he has traded mar1et information in breach of the duty of trust and confidence owed to the source of information.
$ipper and tippee rule also applies to misappropriation.
213 /ETACM/elationship of Trust And Confidence.
EXAMPLE:
Printer $ho $or)e" at a co(pany that printe" infor(ation* through his +o* eventua!!y figure" out the
i(portance of so(e of that infor(ation an" tra"e" on it. Printer vio!ate" his "uty to his e(p!oyer* the
printing co(pany* an" $as !ia!e even though no "uty $as "irect!y o$e" to the co(pany.
EXAMPLE:
Financia! reporter /. Foster @inans $as he!" !ia!e for revea!ing financia! infor(ation he inten"e" to
pu!ish in his @a!! Street ?ourna! co!u(n A#ear" on the StreetB to others $ho tra"e" on the asis of
this a"vance infor(ation. A!though the confi"entia! infor(ation "i" not co(e "irect!y fro( the
corporations $hose stoc) $as tra"e" an" no "uty to those corporations $as reache"* the court
foun" a sufficient reach in the use of (ateria! nonpu!ic infor(ation e!onging to @inans, e(p!oyer*
The @a!! Street ?ourna! CDnite" States v. Carpenter* :E4 F.F" 45FG (F" Cir. 4EHI) aff," GHG D.S. 4E
(4EH:)J.
:oo1 at the 7uestion under both theories. :oo1 first to see if there was traditional insider trading, then e&amine the
7uestion under the misappropriation of information theory. Be certain to mention both theories.
4. Section 4I()K/egu!ation of Short<S$ing Profits L ST/ICT LIABILIT1 STATDTE
a. A per se rule of in'alidity is applied to shortAswing profits made by insiders on inAandAout sales 2sales(purchase3
transactions within a short period of time.
b. 6nder Section 1#2b3, any profit is reco'erable if:
213 made by an officer, director, or beneficial owner of more than 1<L of a class of e7uity security
223 from any sale or a security
233 occurring no more than si& months from a purchase or sale of the same security
c. $his cause of action re7uires:
two transactions 2purchase and sale3, while reco'ery under common law or 1<bA! re7uires only one transaction

d. $o be liable, an officer or director need only:
ha'e been in office at the time of purchase or sale. Also, office or director may be liable for sales made within si&
months of purchase, e'en though he is no longer director or officer
e. A 1<L beneficial owner must ha'e been a 1<L beneficial owner:
at both times 2i.e. must ha'e owned more than 1<L prior to the purchase and prior to the sale3.
EXAMPLE:
0f Shareholder owns EL of the corporation+s stoc1, and then purchases stoc1 which ma1es him 11L, then sells
stoc1, this would not count. $he purchase that puts Shareholder o'er 1<L does not count towards this rule.
Shareholder must own 1<L at the time of both transactions.
'. Other Fe"era! Securities La$ (OL .I.E.)
1. Saranes<O8!ey Act of F55F
a. $he SarbanesA&ley Act 2SH3:
?HA9
$0"

increases the duties of directors of publicly traded companies
b. SH re7uires principal e&ecuti'es and financial officers to certify:
213 they ha'e re'iewed the financial reports
223 that the reports do not contain any untrue statements or material omissions
233 financial statements accurately portray the corporation+s financial conditions
243 they are responsible for implementing and e'aluating the company+s internal control and ha'e e'aluated the
company+s internal controls within the last E< days and they ha'e listed
2a3 any deficiencies in the controlsJ
2b3 any fraud in'ol'ing corporate employeesJ and any significant changes in corporate controls and anything
that could ha'e a negati'e effect on corporate controls.
c. Attorneys must report:
e'idence of any material 'iolations of securities laws or breaches of fiduciary duties to either the chief legal counsel
of the corporation or the .?.
VII. SHAREHOLDER SUITS
A. 'irect an" 'erivative Suits (OL .II.A.)
1. A "irect suit is:
shareholder sues on his behalf to redress an in%ury to his interest as a shareholder
a. $ypical e&amples include:
213 compel payments for di'idends
223 enforce the right to inspect corporate records
233 protect preempti'e rights, to enforce the right to 'ote
243 reco'er for breach of a shareholder+s agreement
2. A "erivative suit:
shareholder sues on behalf of the corporation to redress a wrong to the corporation when the corporation fails to
enforce its right
a. $he shareholders+ right arises from the corporation+s right to sue, and can only e&ist where there has been a wrong
to the corporation.
b. $he most typical type of deri'ati'e suit is:
breach of fiduciary duty
0n e&amining a shareholder suit, as1 who is being hurt= 0f the shareholder is hurt, it is direct. 0f the corporation
is harmed, and the shareholder is suing, it is a deri'ati'e suit.
B. 'erivative Suits (OL .II.B.)
1. Con"itions Prece"ent
a. Conte(poraneous O$nership
213 0n a deri'ati'e suit, the plaintiff must normally allege in his complaint that he:
was a shareholder at the time of the transaction complained of or that his shares passed to
him by operation of law 2i.e. inheritance3 from a person who was a shareholder at that time.
223 0n .alifornia, a shareholder can still bring a lawsuit if:
2a3 there is a strong prima facie case in fa'or of the claim asserted
2b3 no similar action has been or is li1ely to be instituted
2c3 plaintiff ac7uired the shares before there was disclosure to the public or the plaintiff of
the wrongdoing of which plaintiff complains
b. 'e(an" on 'irectors
213 A shareholder must first:
?HA9
$0"

attempt to persuade the board to enforce the corporation+s right by ma1ing a written demand upon
the directors
223 $he e8ception to this rule is where:
demand is futile
2a3 Demand is considered futi!e when:
13 ma%ority of the board is interested in the transactionJ
23 directors fail to inform themsel'es of the transactionJ or
33 the directors fail to e&ercise their business %udgment in appro'ing the transaction
c. 'is(issa!
213 0f a ma%ority of "isintereste" "irectors or a ma%ority of a specia! !itigation co((ittee determine that the suit
is not in the corporation+s best interests, a court will dismiss the deri'ati'e proceeding.
2a3 $he decision must be made:
in good faith and after a reasonable in7uiry.
223 A specia! !itigation co((ittee is a committee appointed by the directors consisting of disinterested or new
directors who then in'estigate the claim.
233 A special litigation committee must:
2a3 disinterested
2b3 operate in good faith
2c3 reasonable in7uiry
243 0f the special litigation committee acts properly, its decision:
protected by business %udgment rule
2. Security Bon"
a. 0n .alifornia, the court may re7uire the plaintiff to post a security bond.
3. 'efenses
a. Since stoc1holders in a deri'ati'e suit stand in the shoes of the corporation, they are sub%ect to the same defenses
that could ha'e been raised against the corporation.
4. /ecovery of E8penses
a. 0f a shareholder wins, the defendant has to pay their legal e&penses.
b. 8owe'er:
any reco'ery in funds in damages gets paid directly to the corporation for because the suit is brought on behalf of
the corporation.
HYPOTHETICAL
0n the pro&y fight at "asadena @indows, a shareholder wants to bring a deri'ati'e action on the e&cessi'e pro&y
e&penses authori)ed by the directors. $he board has 12 directors, all of whom appro'ed the e&penses. 0s demand of
the board of directors re7uired= .an the board do anything to a'oid demand=
0n order to bring a deri'ati'e suit, shareholder has to meet se'eral contingencies, including ma1ing a written
demand to the board. 8owe'er, s(h can sidestep this by asserting that demand is futile because the ma%ority of the
board appro'ed the transaction. $his appears to be the case here so demand is not re7uired as it is futile since all
of the board appro'ed the e&cessi'e pro&y e&penses.
$he board can a'oid demand by appointing a special litigation committee to in'estigate the complaint. $o do this, it
would ha'e to appoint two disinterested directors since e&isting 12 are already interested. Any appointment would
ha'e to be in accordance with the bylaws. 0f the special committee decides, in good faith and after reasonable
in7uiry, that the suit is not in the corporation+s best interest, then the corporation can dismiss the suit and this dismal
is sub%ect to the business %udgment rule.
VIII. CHANGES IN CORPORATE STRUCTURE
A. Shareholder appro'al is re7uired to: (OL .III.A.)
9a1e fundamental changes in the corporate structure, although the directors may pass a resolution recommending,
accepting or re%ecting the proposed changes.
B. $he following are fundamental changes: (OL .III.B.)
1. amendment to articles of incorporation
2. mergers and consolidations
3. sale of all assets
4. dissolution
C. /eorgani%ations (OL .III.'.)
1. 9ergers, sales of assets and share e&changes are generally called reorgani)ation.
2. &ergers
a. one corporation is absorbed into another. Sometimes it is one that sur'i'esJ sometimes brand new company is
formed.
b. Short<For( &erger
213 parent owning E<L of the outstanding shares can merge the subsidiary corporation into the parent corp
c. Effect of &erger
new corporation gets the liabilities, duties and assets of former corporation
3. Sa!e of A!! Assets
a. @hen a corporation sells or transfers all of its assets to another corporation, the purchaser is not liable for the debts
of the seller, unless:
213 e&press agreement that the debts are going to be assumed >
223 there is fraud to a'oid liability
HYPOTHETICAL
9adeline @indows .orp. is primarily engaged in the business of manufacturing highAend windows. Section 0K of the company+s
articles of incorporation pro'ides that one purpose of the company is to -sell, lease, e&change, or otherwise engage in the transfer of
assets of the corporation./ Does this section permit the directors to sell substantially all of the corporation+s assets without
shareholder appro'al= 0s such a pro'ision 'alid=
5o, while sale of asserts is regular course of business, the sale of A:: assets is a fundamental change to the corporation
re7uiring s(h appro'al.
'. 'issenting Shareho!"ers, Appraisa! /ights (OL .III.E.)
S(8+s that do not 'ote for a merger retain the right to appraise their shares and buy them at fair mar1et 'alue. Notice and
objection required, demand for payment, appraisal proceedings
E. 'isso!ution (OL .III.F.)
1. Dissolution is the e&tinguishing of corporate e&istence.
2. .o!untary 'isso!ution
a. .ote of Shareho!"ers
213 A corporation may be 'oluntarily dissol'ed by:
!<L of more of the 'oting power of its shareholders and the filing of a certificate of 'oluntary
dissolution with the secretary of state
b. .ote of 'irectors
213 directors can 'ote for it without shareholder appro'al upon filing a certificate of 'oluntary dissolution if the
corporation is ban1rupt, disposed of all assets and has not done business in ! years, has not issued shares
and is not obligated to do so.
3. Invo!untary 'isso!ution
a. Attorney 6enera!
213 $he Attorney Feneral may bring an action against a corporation see1ing dissolution of the corporation on the
grounds that the corporation has gotten into some 1ind of trouble
b. 'irectors or Shareho!"ers
213 $he directors or shareholders can institute an in'oluntary dissolution where it has become impossible or
impracticable for the corporation to carry on its business.
HYPOTHETICAL
Iohn, 9ar1, Dylan, and >yan decide to form a landscaping business called -4ourlanders, 0nc./ $hey incorporate the business in
4lorida, and each owns 2!L of the outstanding shares. $he business ta1es off, with 9ar1, Dylan, and >yan doing most of the
labor and Iohn managing the boo1s. 4i'e years later, 9ar1 dies, lea'ing his interest to his daughters, Anne and Betty, neither
of whom has any interest in doing the wor1. Dylan goes into a deep depression o'er 9ar1+s death and does not come to wor1
for si& months. 6nable to handle things by himself, >yan decides to sell his share of the business, but no one is interested in
purchasing his shares. @hat are >yan+s options=
>yan can proceed with a 'oluntary or in'oluntary dissolution. 8e can try to get s(h to 'ote to 'ote for dissolution. A
corporation can be dissol'ed with !<L or more 'otes from shareholders. >yan has 2!L of the 'ote so he needs either more
shareholders to %oin him, such as Iohn, or Anne and Betty. $he other option he has is an in'oluntary dissolution, where he
needs either oneAhalf of directors abo'e or shareholders owning at least one third of the outstanding shares to appro'e the
dissolution. 8owe'er, >yan would also need to show that the corporation has gone ban1rupt, abandoned the business,
disposed of its assets and not done business in ! years, and not obligated to do so.
BAR EXAM APPLICATION
Applicants were as1ed to re'iew a se7uence of e'ents in'ol'ing .orp, a publicly held corporation whose stoc1 is registered
under Section 12 of the Securities ?&change Act of 1E34. n Ianuary 2, .orp publicly announced that it e&pected a 2!L
re'enue increase this year. n 9arch 1, a .orp director 2-Director/3 sold 1,<<< .orp shares for ;2! each. n Iune 1!, .orp
learned that, because of unforeseen e&penses, its re'enues would decrease by !<L this year, contrary to its Ianuary 2
announcement. n Iune 1#, a .orp officer 2-fficer/3 consulted his lawyer 2-:awyer/3 for personal ta& ad'ice. fficer
mentioned, among other things, the probable de'aluation of his .orp stoc1. n Iune 1B, :awyer telephoned his stoc1bro1er
and bought a put option for ;1,<<< from ption.o. $he put option entitled :awyer to re7uire ption.o to buy 1,<<< .orp
shares from :awyer for ;2< per share. n Iune 1D, .orp publicly announced that its re'enues would decrease by !<L this
year. 0ts stoc1 price fell from ;3< to ;! per share. n Iune 1E, :awyer bought 1,<<< .orp shares at ;! per share and re7uired
ption.o to buy the shares for ;2<,<<< pursuant to the put option. n Iuly 1, Director bought 1,<<< .orp shares for ;! per
share.
0n each of the foregoing e'ents, which of the actions by Director, fficer, and :awyer constituted a 'iolation of federal
securities laws and which did not=
Applicants must analy)e for each party whether he has 'iolated >ule 1<bA! or Section 1#2b3 and on what grounds.
Insider trading liability occurs when officers or directors breach their fiduciary duty by disclosing material facts for a benefit.
Officer did not trade so he does not have insider-trading liability. e also does not have tippee liability. !ven though he cannot
pass inside information for a benefit, Officer is allowed to discuss material facts with a professional advisor. "his is neither an
intentional or rec#less violation of his duty unless the officer was compensated for the info but there is no violation of duty, and
since there is no breach of duty, there is no securities violation.
$nder traditional insider-trading, tippee liability is derivative and if the tipper did not breach the duty, the tippee is not liable for
the breach either. %awyer has not violated traditional insider-trading laws since the officer did not breach his duty by discussing
the material facts with the lawyer, the lawyer could not violate a duty by trading on the information. owever, the lawyer is
bound by attorney-client relationship and owes fiduciary duty to his client. e is still liable for misappropriation of inside
information for breach of the duty of trust and confidence owed to the source, the Officer. "herefore he breached his duty by
trading on the information. &hether he bought puts or stoc#s is not relevant. 'ince he violated his duty of trust and confidence
with his client by trading on material facts, he is liable under rule ()b-* for misappropriation of insider information.
+ (,b violation occurs when an officer, director, owner of ()- of stoc# ma#es a purchase and sale of the same security within
si. months. "he statute does not require intent. ere, the Director violated section (,/b0 by selling and purchasing his shares
within , months of either transaction. e sold ())) shares for 12* each on 3arch ( and bought ())) shares at 1* share on
4uly (, which is a sale and purchase within , months. e is liable to the company for 12),))) which is the difference between
the sale price and the purchase price times the number of shares.
IX. TAKEOVERS AND CORPORATE CONTROL TRANSACTIONS
A. Ten"er Offers (OL I0.A.)
1. 0ndi'iduals, groups of corporations see1ing to ac7uire another corporation normally attempt to do so by negotiating with
the board of directors. 0f this fails, the would be buyers go directly to shareholders and ma1e a tender offer
2. A ten"er offer is a:
public and usually published solicitation by a bidder of the publicly held shares of the corporation to be ac7uired 2target3

3. $he offer is usually made at a premium o'er the current mar1et price.
4. $he bidder also need not accept the tender of more shares than any ma&imum number of shares specified in the tender
offer.
!. Defensi'e tactics by target companies against ta1eo'er attempts include:
a. white 1night * finding a more acceptable bidder
b. poison pills * creating classes of stoc1 that increases tin rights if any person ac7uires more than a specified
percentage of shares, ma1ing ac7uisition more e&pensi'e for bidder.
B. Fe"era! /egu!ation of Ten"er Offers (OL I0.C.)
1. The @i!!ia(s Act
a. 7o Secret Purchases
213 A party that directly or indirectly ac7uires more than !L ownership of a corporation must disclose certain
information, such as:
2a3 party+s identity and number of shares held, source and amount of funds ma1ing share purchases
2b3 arrangements the party had made with others concerning shares of the targetJ party+s purposes in
ac7uiring the shares and intentions regarding the target
b. Ten"er Offer 'isc!osure
213 A bidder must disclose, on the day it commences its tender offer:
2a3 purpose of th tender officer, bidder+s plans for the target, past negotiations between bidder and target,
bidder+s financial statements, regulatory appro'als that may be necessary and any other material info.

c. Fa!se or &is!ea"ing State(ents
213 Section 142e3 of the ?&change Act prohibits:
false and misleading statements or omissions in con%unction with tender offers.
223 Section 142e3 also prohibits:
insider information trading in a tender offer
2a3 5ote:
5o re7uirement for duty to anyone. 0n securities, use rule 1<bA!, and 142e3 in tender offers
X. PROFESSIONAL CORPORATIONS
A. Professiona! Corporations (OL 0.A.)
1. For(ation
a. $he only indi'iduals who may be shareholders are those who are licensed or otherwise legally authori)ed within the
state to render that professional ser'ice.
b. "ersons entitled to form professional corporations include attorneys, accountants, and 'arious medical personnelM
e.g., physicians, surgeons, and dentists.
213 $he persons must all be of the same profession, howe'er.
2. Liai!ity
a. Shareholders en%oy limited liability, but must post a bond for those who interact with the corporation.
BAR EXAM APPLICATION
Question 6
Applicants were as1ed to analy)e issues arising from Adco, 0nc.+s inability to pay for ser'ices pro'ided by @eb, 0nc. Beth,
.harles, and Da'id, directors of @eb, 0nc., agreed to pro'ide ser'ices and e&tend credit to Adco, 0nc. conditioned on re'iew of
Adco 0nc.+s financial statements. After Adco 0nc. informed him that the sooner @eb, 0nc. could begin its wor1, the sooner it
could pay them, Da'id falsely told Beth and .harles that he had re'iewed Adco 0nc.+s financial statements and that they should
proceed with the wor1. Beth and .harles agreed without further in7uiry. After Adco, 0nc. was unable to pay, Beth, .harles, and
Da'id learned that Adco 0nc.+s shareholders had regularly ta1en its funds for their personal use.
@hat duties to @eb, 0nc., if any, ha'e been breached by Beth, .harles, and Da'id regarding the money lost on the Adco 0nc.
%ob=
Applicants must analy)e director liability for breach of duty of care and the business %udgment rule as a possible defense.
@hat rights, if any, does @eb, 0nc. ha'e against Adco 0nc.+s shareholders for Adco 0nc.+s failure to pay for the web site=
Applicants must analy)e the doctrine of piercing the corporate 'eil to determine the potential liability of Adco 0nc.+s
shareholders.
5rom the 4uly 2)), 6alifornia 7ar !.am
&hat duties were breached8
+ director has duty of care to corporation, which requires a director to act in good faith and e.ercise the care of an ordinarily
prudent person on behalf of the corporation. David breached this duty of care when he lied to the other directors about the
finances of +dco. is actions may even amount to bad faith in this instance, as it goes beyond rec#less disregard. e is not
protected by business judgment rule because he made uninformed decision and his actions constituted bad faith.
7eth and 6harles are entitled to rely on an e.pert when acting on behalf of a corporation. +n e.pert can be another director if
there is a reasonable basis for the reliance. 'ince it does not appear here that 7eth and 6harles had any reason to not rely on
David, they can assert reliance on e.pert opinion as a defense and their approval would not subject them to liability. owever,
they did not ma#e any further inquiry into +dco and they may have acted in good faith, but not following up with even a
question is not sufficient information. "hey just rubberstamped what David said and there is a good chance that they would be
found to violate duty of care and the fact that they were not informed would prevent them from using business judgment rule.
9iercing the 6orporate veil
&ebco may have a claim for piercing the corporate veil of +dco. :eil may be pierced when there is a unity of interest between
shareholders and corporations and to not pierce would lead to injustice or fraud. "he fact that +dco was alluding that it could
enter into contract with &ebco when they did not have financial capacity amounts to fraud. "hey also appear to have
comingled funds as shareholders had frequently ta#en funds for their personal use. If these funds were withdrawn without
formalities and that left +dco unable to pay creditors, then it is possible that veil would be pierced and +dco shareholders held
personally liable. 7ut even if the funds were properly ta#en, if they left +dco in inadequate financial capacity and unable to pay
creditors, shareholders may be personally liable for the dividends and need to return those funds.