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I.      Corporations

A.            Definition

         Creature of the law with an identity or personality separate and distinct from its owners and which, by necessity, must act through its agents.

B.            Four Characteristics

1.       Artificial entity created by law

2.       An entity separate from its owner and managers

3.       It has certain rights and powers exercised through its agents

4.       It has the capacity to exist perpetually (doing business as = dba)

C.            Piercing the Corporate View

         As a separate entity, the corporation is liable for its own debts, obligations and liabilities.  Shareholders, directors and officers are generally not personally liable.  There exists a limited liability on the part of the owners. Courts are reluctant to pierce the corporate veil.  Limited Liability spurs private investment and protects an investor from personal liability.  This is a form of protection from liability that encourages investment. 

         If creditors (not American express, Mastercard, visa, etc.) are able to routinely pierce the corporate veil and get at the corporate assets and shareholders, then what good is that corporate structure?  If we have under the law LLP and creditors are able to pierce that veil, then we have no form of protection.  Courts are reluctant to pierce the corporate veil.  Courts do it only to prevent inequity, to ensure justice and prevent fraud.

         Question:  Is the corporation being operated as a corporation or as the alter ego of its owners?

         Criminal liability is not the issue here.  Remember the distinction between outside investors who have no say so in the day to day management and operations of the corporation as compared to the actual senior management of the corporation.

         We are talking about the financial responsibility of a corporation.

Factors for determining when to pierce the corporate veil

1.      Improper or incomplete incorporation

2.      Commingling of corporate and shareholder funds  - when we are operating AS ourselves where we draw checks from the corporate account for our personal expenses.  Individual is operating that corporation as an ALTER EGO of our self.

3.      Failure to follow statutory formalities and maintain statutory requirements.

4.      Failure to hold regular shareholders and directors meetings.  Formalities are very important where meetings must be held to sustain the maintenance of the corporation.

5.      Failure of the shareholders to represent themselves as agents of the corporation, rather than individuals, when dealing with outside parties.

6.      Under Capitalization operating it just as a shell, operating it under our own control. 

Laws That Govern the Corporation

         State law in the form of statutes companies may be headquartered in New York   This comes from the state is domiciled which is where the corporation is formed.  One half of the corporations on the stock exchange are located in Delaware.  No corporate taxes, DE attracts companies to fom in its state.  This is called the state of incorporation.  These are governed by the laws of the state.  In Delaware,

         Anonymous ownership is allowed

         No Corporate taxes

         Hostile takeovers are not allowed

         What meetings are required

         How are proxies are governed

         The laws that govern the operation (as a foreign corporation) of a corporation are governed where that company operates.

         Statutes play the most significant role in corporate operation.    Statutory rules are the real authority that governs corporate law. 

         Federal Statutes

         Security Exchange Act of 1934 and Securities Act of 1933

Advantages

         Limited Liability extends to shareholders and officers where liability is limited to a corporations investment because it aids in the investment of capital.

         Beneficial Tax Treatment Corporation is taxed as a separate entity on the net income earned by a corporation.  It can itemize expenses.  You can also choose a fiscal year that best fits its operation cycle.  Pass Thru entities allow the profits and losses to pass thru to the shareholders.

         Business Continuity  - relates to the perpetuity of a corporation where you can freely sell shares, or sell out.

         Centralized Management through the directors who are allowed to run the day to day operation for the board of directors.  Shareholder can be an officer or manager.  Examine the bylaws of a corporation.

         Transferability of Ownership where shares of stock may be bough or sold freely.

         Ability to Raise Capital -

         Restrictions death of a shareholder where stock transfers to a shareholders heirs.

Disadvantages

         Corporate Formalities and Reporting Requirements what must be done by virtue of corporate formation. 

         Double Taxation - where the shareholders are taxed on their dividends. Corporation must pay taxes on their earnings.  The corporation income is taxed twice.  Franchise taxes, state taxes and corporation taxes that are unique to corporations must be paid.

Types an Classifications

1.      Business Corporation most common type of corporation that may be formed for the purpose of engaging in any lawful business.  Unrestricted in the type of corporation (C corporation).  Limitation in the number of shareholders, foreign ownership

2.      Professional Corporation a fairly recent creation where the purpose is limited to rendering professional services within a single profession.  Typical professions that are allowed are physicians, surgeons, chiropractors, podiatrists, engineers, physical therapists, psychologists, CPAs, dentists, veterinarians, attorneys, optometrists and acupuncturists.  Allow entities to take advantages of corporation advantages.  Example: malpractice lawsuits

         Restrictions stock ownership and what type of shareholder, corporate purpose

         Bylaws v. Articles of Incorporation are different.  The process of altering the AoI is complex.

3.Non-profit Corporations allows an exemption from federal taxation.  To benefit from those exemptions it must meet these requirements of 501(c)(3) for religious, charitable or civic purposes.  Examine the bylaws of the corporation.  All profits are going to either be reinvested in the corporation or be invested in other non-profit organizations.

4.S Corporaton special class of corporation recognized for tax purposes.  Note:  taxation on dividends is a present issue where taxes are going to be eliminated on dividends.  Large C corporations are not afforded these types of tax exemptions.  Eliigibility requirements: small business may file under this type of corporation if all shareholders agree.

               Eligibility Requirements (section 1361 of the IRC:

               Must be a domestic corporation (created under the law of any state

               No more than 75 shareholders

               Not own 80% or more of the stock of an active subsidiary corporation

               Must have shareholders which are individuals, decedents estates, bankruptcy estates, or certain trusts;

               Have no nonresident alien shareholders; and

               Have only one class of stock issued and outstanding (one class of common stock which provided for voting and nonvoting rights would be permitted, however, common and preferred shares would make the corporation ineligible to make the election)

               Corporation may not be a member of an affiliated group cannot be a holding company

               May not be a financial institution

               May not be an insurance company

               For your reference, a copy of IRS Form 2553, Election by a Small Business Corporation

Benefits S Corporations are taxed like partnerships where loss items pass through to the shareholder to offset other items of income  Because tax matters are hanhdled at the shareholder level, taxation at the corporate level does not occur. 

         These benefits are especially attractive for start-up corporations which are likely to experience losses in the early years.  These

         Blue Sky laws are relevant here.

         The stock of these corporations are not traded publicly. 

5.       Statutory Close Corporations (closely held)

         No more than 50 shareholders

         No ready market for the stock

         Centralized management structure is less important here.

         Allowed to place restrictions on the transfer of shares.

         Allowed to operate without all of the statutory formalities that are imposed on other corporations such as the absence of board of directors, bylaws.  This can be a burden when you only have 2 shareholders.

         Must include a statement in the AoI that it is a CLOSED CORPORATION.  Stock certificates must have specific language on their face indicating that it is a closed corporation. 

Parents and Subsidiaries

Corporation must own stock in another corporation which is sufficient to control that other corporation. 

Types of Corporations:

1.   Sole Proprietorships most prevalent business form in the united states.  This is not the most significant.  1987 there were 13 million and only 3 million corporations.  Sole owner of all assets and is individually liable for all debts incurred.  This is an extension of the owner and is not a separate entity. 

Advantages is that the sole proprietor is the king/queen of the business with full management authority. 

Minimal formality requirements unlike a corporation or LLC.  These are not formed by any statutory authority

Low cost of organization

Income tax benefits  - no double taxation. Income reported on a scheduled personal income tax.  Profits and losses are added to the owners income.

Disadvantages

Unlimited liability

Lack of business continuity

Difficulty in transferring owner interest

Limited ability to raise capital

Hires employees, must obtain a federal employer identification number

General Partnership

Must have at least two people.

An association of two or more persons to carry on a business as co-owners for profit. 

Profit must be a goal of this formation.

Distinctions

All partners are termed general partners.  They are all personally liable for the partnerships debts and liabilities.  Contrast to a limited partnership there are no limited partners.  General has the same characteristics as a limited partnership. 

They have the fiduciary duty to each other

      Partners rights

Each partner is a co-owner of the partnership.  Sometimes referred to as a tenancy in partnership

Each partner is entitled by statute to participate in the management of the partnership.  Partnership agreement may change this entitlement.  A partnership agreement may choose to nominate a managing partner.  Cannot be denied the right to management unless that right is waived. 

Liability of Partners they are jointly liable for all debts and financial obligations. 

Each party is able to participate. 

Advantages

A written partnership agreement is necessary to resolve problems where participation in management concerns and issue are addressed here and is recommended. 

Low cost of organization

Low tax benefits

Increased ability to raise capital

Disadvantages

Unlimited liability

Lack of business continuity


Business Associations

 

Sole Proprietorship

General Partnership

Limited Partnership

Corporation

Associates

No

Yes

Yes

Yes

Objectives to carry on a business

Yes

Yes

Yes

Yes

Continuity of life

No

No

Yes, as to the limited partners

Yes

Centralized management

No

No

Yes

Yes

Limited liability

No

No

Yes, as to the limited partners

Yes

Free transferability of interest

No

No

Yes, limited partners interests in capital and profits

Yes

Legal documents required

No

No

Yes

Yes, Articles of Incorporation

Taxed as an equity

No

No

No

Yes, unless S Corporation

 

Limited Partnership

Section 1 of the Uniform Limited Partnership Act defines a limited partnership as a partnership by two or more persons having as members one or more general partners and one or more limited partners.  Cannot be composed entirely of limited partners.  Limited partners are more like investors where their partnership is limited to their investment and they are not a part of management.

If a limited partner engages in management, he loses his limited status and becomes a general partner.  Limited partners do have

         Right to inspect the partnership records

         Request information on the operations of the business

Formalities

In order to build that veil of limited liability, we have a Certificate of Limited Partnership in New York State.  This must be executed and filed before the existence of a Limited Partnership begins.

Subject to the same reporting requirements of a corporation.

Costs involved are much more significant. 

Limited Liability Company (since 1978)

This is an unincorporated entity that combines the attributes of a partnership with the limited liability characteristics of a corporation. 

Individuals can be members of this corporation, also corporations, trusts, nonresident aliens

No limitation on the number of participants

Any business venture may operate (professionals) as this entity.

Income tax single taxation does not pay taxes directly to the federal or state government.  Each member will report taxes individually.  There is no double taxation.  Pro-rata shares. 

Needs one or more organizers to form an LLC.  This organizer repairs, signs the article of organization with the department of state. 

Members must adopt a written operating agreement.  This document establishes the rights, powers, duties and obligations of the members. 

 

Articles of organization is formed with the state.

LLCs versus S Corporations

 

S Corporation

LLC

Number of owners

No more than 75.  All shareholders must consent to the election

No maximum limit.  Some states still require at least two members to form.

Nature of Owners

Individuals, U.S. citizens and resident aliens, decedents estates, bankruptcy estates, and certain trusts, charitable organizations, and certain qualified plan trusts

All S corporation eligible owners plus corporations, limited or general partnerships, most trusts, nonresident aliens, and pension plans.

Nature of Ownership

Single Class of Stock

Different Classes and priorities of ownership permitted.

Tax Differences

Shareholders basis in stock not increased by proportionate share of corporation liabilities

Distribution of appreciated assets by S corporation to shareholders results in realization of gain on distribution

Dividends may not be subject to self-employment tax (consult your tax advisor).

LLC member has basis increase by proportionate share of corporation liabilities.

Generally, no current taxable recognition of gain at time of distribution.

Earnings may be subject to self-employment tax.

 

 

 

Corporate Formation

Process Prior to filing:

1.       Decide on a corporate structure; partnership, LLC, LLP, non-profit

2.       Choose a Domicile statutory law dictates if it is better to incorporate in another state (DE).  Does the state law allow our corporation to operate in a manner to be desired?  Chose whether it would cost less to operate in another state.  Think about the states judicial policy.  Delawares judicial system processes and policy are superior and more expedient than other states.  Corporate Name availability  Corporate shareholders meetings conducted in the state of domicile.  Annual reporting requirements states Blue Sky laws must be examined.  State corporate records and offices location issues.  (Hostile takeover)  examine the advantages and disadvantages

3.       Promoters becoming less important

4.       Pre-incorporation Agreements enforceable (liability and authority issues)  there may be some contractual obligations that exist. 

5.       Stock subscriptions an agreement to purchase a stated number of shares at a stated price.  This is a means for acquiring and raising capital.  Must ratify the stock subs and execute an issue to those subscribers.  This must be done prior to formation.  Examine the basis for authority

Gathering Client Info:

1.                   Proposed Corporate Name 1st Choice and alternatives

2.                   Business to be conducted corporate purpose is inclusive

3.                   Will the business be conducted in the state of incorporation

4.                   Will the corporations business be conducted in other states

5.                   Total capital needed to begin busiens

6.                   Amount of capital contributed by founders (initial shareholders)

7.                   Is any public financing planned?  Set up bylaws to allow certain things to happen. 

8.                   Tax treatment S Corporation; projected income or profit or losses.  Does corporation need to accumulate capital?

9.                   Number of initial directors and who?

10.               What officers will the corporation have?  Salaries, bonuses, term of office, powers to remove them

11.               Where is the principal office to be located?

12.               Where is the annual meeting of shareholders to be held?

13.               What is the corporations fiscal year?

Incorporator the individual who signs and files the AoI.  Assigns the AoI and ceases after the AOI is filed.  May elect the board of directors. 

Articles of Incorporation (Certificate of Inc.)

New York Business Corporation Law is the authority.

Mandatory Provisions (MBCA)

         Corporate Name

         Number of shares authorized

         Address of registered office and name of the initial registered agent at that office (optional in New York)

         Name and address of each Incorporator

These are the minimum requirements.  Limitations are placed in the bylaws and are easier to alter than the Articles of Incorporation. 

1.                   Corporate Name must not be deceptively similar to another corporation or entity in the sate of record.  Name has certain requirements and must include the words: corporation incorporated, company or limited or their abbreviations. Must appear in all the places in Articles of Incorporation; 1st heading, 2nd heading and 3rd space on reverse of the form

2.                   Stock the Articles of Incorporation must indicate the number of shares on each class of stock. 

3.                   Registered office and Registered agent the office is going to be the place where process may be served.  The sate must be formed of the location of the registered office.  A registered or a registered agent will be required in each state that the business is authorized to transact business.

Optional Provisions

1.                   Initial Board of Directors Incorporator puts this together sometimes attorney does this.  Reduce costs by not using an attorney.  Incorporator role is very small.  The promoter may be doing these things for years.  Promoter and Incorporator may be the same person. 

2.                   Purpose required in most states must be a lawful purpose and may be general or specific. 

3.                   Management of the corporation

We may include in our Articles of Incorporation the provision of management of our corporation. 

4.                   Powers of the corporation any limitations on the powers of the corporation, directors and shareholders must be made in the Articles of Incorporation

5.                   Any other provisions required or permitted in the bylaws. 

6.                   Par value of stock we can assign it, classes of stock

Executing the Articles of Incorporation (New York)

By mail:  New York Dept. of State
Division of Corporation
State Records and Uniform Commercial Code
41 State Street
Albany, New York 12231

Fees
Cert of Inc $125 plus min at $10 tax on stock to be issued or .05 per share.

Expedited handling one to four weeks look at fees

Reservations of Name $20

Organizational Meetings

Attended by incorporators, initial Board of Directors and shareholders.  After the inc, the initial Board of Directors will make the call to hold the meeting.  Purpose 1) appoint the officers, 2) adopt the bylaws, 3) carry out any other business (sign leases, deciding on trade name, etc.)  If initial Board of Directors are not named, the incorporators shall hold a meeting to 1) elect the directors to complete the organization of the corporation. 

Purpose: 

1.                   Election of officers

2.                   Subscription and payment of capital stock

3.                   Adopt the bylaws

4.                   Any other necessary steps to transact business

Board of Directors Resolutions:

1.                   Approval and Acceptance of the Articles of Incorporation

2.                   Acceptance of stock subscriptions names of shareholders, class and type of stock each shareholders holds and the consideration by the corporation from each shareholders

3.                   Ratification of the Acts

4.                   Election of officers directors will do this

5.                   Adoption of bylaws

6.                   Approval of Accounting Methods includes fiscal years, authorization of appropriate security filings there may be none

7.                   Authorization of appropriate securities filings

8.                   Banking Resolutions financing

9.                   Approval of the S Corporation election

Bylaws

Rules and guidelines for internal government and control of the corporation.  Will prescribe the rights and duties of the shareholders, directors and the officers.  A K between the corporation and its members.  Bylaws may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with the law or the Articles of Incorporation.  It must replace the Articles of Incorporation if it chooses to change it. 

Considerable flexibility is available for the creation of the bylaws. 

 

Common matters addressed in the bylaws. 

Section 1.1             Principal Office

Section 1.2            Registered Office; Registered agent

Article 2.1            Annual Meetings annual shareholders meeting shall be held on the first Monday of December of each year..Notice the time, place and notice requirements for our annual meetings.

Section 2.3             Requirements for holding special meetings.  Minority shareholders rights

Section 2.4             Place of Meeting

Section 2.5             Notice of Meeting

4.                    Number & Term of Directors

5.                   Meetings of Board of Directors

6.                   Removal and Resignation of Directors procedures for removing particular Board of Directors; how are resignations to be tendered; do we will the vacancy, leave it vacant until the next term; how o

7.                   Director and Officer compensation

8.                   Officers number and election of officers, term of office, removal and the resignation of officers; vacancies, powers and duties. 

9.                   Stock Certificates forms,.classes of stock, required signatures; restrictions on transfers of stock, means of replacing shares of stock that are lost or destroyed

10.               Dividends method for determining how and when dividends are to be paid and the method of payment

11.               Fiscal year

12.               Corporate Seal if corporation plans to use it, not required to be used in New York.  Statement in the bylaws will state this.

13.               Corporate Records documents that are recorded over the life of the corporation.  Location, where they are kept, inspection rights for officers, directors and shareholders, if I am a minority shareholders, can I demand to see the records?

14.               amendment of bylaws what is the procedure for amending the bylaws

15.               signatures dated and signed by the secretary, where they are kept Articles of Incorporation are placed in the front of the book, along with all of the meetings that have occurred are all kept.  Corporation paras are responsible for keeping the minutes of the meetings. 

 

Board of Directors

Resolutions and meeting are where they are passed

Meetings and Resolutions

Relaxation of corporate rules

Organizational meetings is a Board of Directors meeting.  Type of meetings and how they will take place historically they were formal and laws dictated the procedures.  Any time that the Board of Directors makes a decision happens at a meeting, often referred to as the meeting. 

An action can be taken by consent.  A way to avoid a meeting in order to take action.  Telephonic meetings are also acceptable.  Frequency of meetings that are regularly scheduled.  May be scheduled once a year.  Frequency of these meetings depends on the degree to which the directors are involved in the day to day operations of the corporation.

Purposes: 

Election, reelection and replacement of officers; ratification of the acts of officers for the past year; review past events and take action on matters that require action for the upcoming year. 

Typical Agenda:

1.                   approve the minutes of the last meeting;

2.                    approve dividends to be paid to shareholders

3.                   review financial reports

4.                   elect officers

5.                   set compensation for the officers for the upcoming year

6.                   approve bonuses for the officers and directors

7.                   ratify acts for officers/directors

8.                   etc.

Notice of Meeting

Must be given in accordance of statute. 

Regular meetings of Board of Directors may be held without notice of the date, time, place or purpose of the meeting unless the Articles of Incorporation or bylaws provide otherwise. 

Where notice is required:  this is set forth in the bylaws.  This usually allows directors to waive the notice requirement and state that attendance of a meeting constitutes waiver. 

Formal Notice

Written, includes the date, time and place of the meeting, purpose of the meeting and is usually dated, signed by the secretary. 

Minutes of the meeting:  Complete and accurate minutes of the meeting must be taken at the meeting.  Typically they are taken and signed by the secretary and then placed in the corporate minute book along with a copy of a Notice of the meeting.  Waivers of notice as well as any other documents pertaining to that meeting.

Special Meetings

Meetings and statutory requirements for meetings. 

Board Actions without Meeting

1.                   Unanimous Written Consent this is a unanimous writing of the board.  Writing is similar in form to the minutes. 

2.                   Telephonic meetings allows regular and special meetings to be held thru any means of communication by which all directors can simultaneously hear each other during the meeting. 

Shareholders Meetings

Annual shareholders meetings is required by statute and the bylaws.  The bylaws will specify the time and date for the meeting and whether they will be located in or out of the state of domicile.  Consent meetings have eliminated many annual meetings for smaller corporations.

Annual meetings are usually used for the election of directors; to report to the shareholders about the status of the corporation financially and competitively; and to introduce new products or ideas that the corporation is planning to pursue.  Other matters may also be presented by the shareholders.

Special meetings are called to discuss matters of great significance to the corporation.  Fundamental changes to the corporation would require a special meeting unless presented at the annual meeting.

If no meeting is scheduled, the shareholders as a group can request a court order to compel the occurrence of a meeting. 

Who can call a special meeting?

The bylaws should answer this question.  The Board of Directors can call a special meeting. 

Is Notice required?

Notice is required for annual and special meetings of shareholders.,

Proxies

Authority given by the holder of stock to another who has the right to vote that stock to another to exercise his right to vote.  A proxy is a representative appointed to act in anothers place.  Shareholders may appoint a proxy to vote their shares at shareholders meetings.  To be effective, a proxy must be in writing and must designatge the person or persons authorized to vote on behalf of the shareholders

Proxies are generally effective for up to 11 months unless earlier revoked.  Proxies are easily revoked and the last proxy time prevails over any earlier proxy appointments.  You may hear the expression, coupled with an interest.  A proxy coupled with an interest is irrevocable.

General Proxy

No limitation on voting.

Limited Proxy

Power to vote on a specific matter in a specific way. 

Quorum

A quorum is the minimum number of directors necessary for the board to conduct business.  Unless the Articles of Incorporation or bylaws require otherwise, a quorum is a majority of the number of directors.  If there are 10 directors, at least 6 are required for the board to transact business.  If there are five or fewer in attendance, the board can discuss corporate matters generally, but cant authorize or approve any corporate action.

1.                   A quorum must be present.

2.                   A sufficient number of shareholders present must vote in favor of the proposed action.

Bylaws dictate what an action is. 

As an alternative, the matter could be submitted to the shareholders for approval.  This approach may only be feasible when the directors meeting precedes the annual shareholders meeting.  Otherwise, the corporation will incur the expense of sending out notices to the shareholders.

Are there any voting requirements for the board?

Each board member has one vote on all matters presented.  Board members must contribute his or her independent business judgment and act in a manner which he or she believes to be in the best interests of the corporation and not the board.  For these reasons, board members, unlike  shareholders, may not vote through proxies.

Cumulative v Straight Voting

A shareholder  who owns 100 shares can cast 100 votes on each issue.  Cumulative voting, a shareholder who owns 100 shares has the same number of votes to cast but can choose to cast them all for one candidate. 

Role of legal assistant in the corporate formation process

The corporate paralega is expected to be able to conduct the following actitivites during a corporate formation: 

* Check availability & reserve corporate name. * Draft & file Articles of Incorporation. * Complete & file qualification of foreign corporations. * Obtain good standing certificates from Secretary of State. * Draft bylaws. * Draft notices & minutes, or consents of organization meeting. * Draft Subscription Agreements. * Issue & transfer stock, prepare stock certificates & shareholder registers, & prepare & maintain analyses & charts of outstanding securities. * Draft banking resolutions. * Draft Shareholder Agreements. * Prepare necessary documents for opening of corporate bank account. * Draft Employment Agreements. * Complete & file assumed name certificates. * Complete & file Election by Small Business Corporation & subsequent shareholders consents to such election. * Complete & file Application for Employer Identification Number. * Complete & file Application for Workers' Compensation. * Notify State Tax Commission of stock book location. * Prepare & file DISC elections. * Complete & file Application for Unemployment Insurance. * Complete & file Application for Employer Withholding Tax Registration. * Complete & file application for appropriate licenses to operate specific businesses. * Complete & file trade name applications, copyright applications, & financing statements. * Order minute book, stock book, & seal. * Draft & file application for proper licensing when forming professional or special purpose corporation. * Draft response to auditors' request for info. * Prepare & file annual reports. * Maintain a tickler system for annual meetings. * Draft notices, proxy materials, ballots, affidavits of mailing, agendas for annual meetings &special meetings. * Draft resolutions to be considered by directors. * Draft oaths & reports of judges of election for annual meeting. * Draft shareholders' & directors' minutes. * Draft written consents in lieu of meetings. * Draft documents & correspondence necessary to effect dissolution & liquidation, consolidating merger & sale of substantially all of the assets of corporations. * Draft stock option plan, maintain stock option registers & related charts. * Collect info, draft documents & correspondence necessary to adopt qualified profit-sharing & pension plans & related trust agreements & other documents. Submit such materials to I.R.S. for determination letters. * Draft & organize closing documents on corporate acquisitions. * Draft lease agreements. * Draft Articles of Merger or Consolidation, Plan of Merger or Consolidation. * Draft closing checklists & closing memoranda. * Prepare closing files & assist in closing. * Draft articles of dissolution. * Perform due diligence investigation. * Compile & index documents in corporate transactions. * Draft partnership agreements & amendments. * Draft statements of partnership & certificates of limited partnership. * Draft certificates of amendment to certificates of limited partnership. * Prepare & publish Notice of Substance of Certificates of General & Limited Partnership. * Draft minutes of partnership meetings. * Draft non-competition agreements for selling partners. * Draft Agreement for Dissolution of Partnership. * Draft & publish Notice of Termination of Partnership (or Continuation of Successor Business). * Draft certificates or cancellation of certificates of limited partnership. * Draft & file trade name documents & amended trade name documents. * Draft analysis in connection w/tax planning & draft state & federal tax returns & prepare for audit. * Prepare documents for qualification to do business in foreign jurisdictions. * Prepare necessary documents to amend & restate Articles of Incorporation & amend bylaws. * File & terminate UCC Financing Statements w/state & county offices. * Search state & county offices for federal tax liens, UCC filings, deeds, mortgages, & judgments. * Prepare & file DBAs, certificates of trade names, & certificate of assumed names w/the appropriate state office. * Prepare & file governmental applications & reports. * Collect info from & verify filings w/the Secretary of State & other state & local agencies. * Change registered office or agent. * Prepare reports to the Securities & Exchange Commission (SEC) & New York Exchange. * Obtain info for SEC & other public agencies. * Attend corporate meetings. * Prepare & maintain corp records of subsidiaries, along w/minutes of all incentive compensation plan committees. * Follow up trademark & patent searches w/Trademark Counsel. * Maintain & file Abandon Property reports (escheat laws) w/all states. * Prepare Blue Sky survey & Blue Sky forms & other documentation relating to public & private sale of securities. * Research facts (e.g. public library, newspaper files, financial publications). * Research statutes. * Prepare Summary Plan Description.

Corporate Dissolution

Voluntary dissolution is the most common type of dissolution that has been approved by the directors and shareholders.  Provisions are incorporated in the bylaws. 

Filing of Articles of Incorporation

Finish the affairs

Liquidate assets 

Distribute balance to shareholders

If dissolution takes place prior to the commencement of business, this can be accomplished by filing the aod on the approval of the incoporators or the initial Board of Directors.  Subsequent to the commencement of business, the process becomes more complex, dissolution must be approved by the shareholders by a majority vote after the proposal of dissolution by the Board of Directors.  Amount of votes may be increased by the bylaws or the Articles of Incorporation.  This approval will be documented in a resolution to dissolve. 

Articles of Dissolution

After filing, corporate existence continues but is considered a dissolved corporation.  You may continue only for the purpose of winding up the affairs. 

Elements in the Articles of Dissolution

1.                     Name of the corporation

2.                     Date of dissolution

3.                     summary of the vote of the shareholders

4.                     Signed/Dated

Every state has statutes concerning the order of winding up affairs.

MBCA lists the following:

1.                   collection of assets

2.                   disposition of properties that will not be distributed to the shareholders (liquidation process)

3.                   discharge of corporation liabilities

4.                   distribution of the remaining properties in accordance with their interests

Involuntary dissolution

Result from judicial proceedings via an order of dissolution, when entered, a receiver is appointed.  These type of proceedings can be bought by the attorney general, shareholders and unsatisfied creditors. 

 

 

Monday May 5, 2003  Corporate Law One  Day Four

 

Directors

 

Delegation of authority to Officers is provided in the bylaws.  Directors are given the statutory authority to make most decisions regarding the operation of the corporation.  State law allows for the creation of the Board of Directors with a wide breath of authority.  Can limit or allow full breath of authority.  Subject to election by shareholders and review and approval of shareholders.

 

Directors appoint officers.  Officers authority is sometimes general, sometimes specific, sometime both.

 

Board must delegate authority

 

Directors are responsible for acts of the officers they appoint. 

 

Specific authority is passed via:

Resolutions

By directors

In the bylaws

In the Articles of Incorporation

 

Delegation of Authority to Committees directors also commonly delegate authority to one or more committees comprised of members of the Board of Directors Delegation of authority to committees

 

MBCA says directors committees may not do the following:

1.                  cannot authorize dividends or distribution of shares to the shareholders -

2.                  may not approve or propose to shareholders actions that require shareholders approval.

3.                  cannot filling vacancies on Board of Directors or any of its committees

4.                  cannot amend the Articles of Incorporation

5.                  cannot adopt or amend or repeal the bylaws

6.                  cannot approve a plan of merger that doesnt require shareholders approval

7.                  cannot authorize or approve the issuance of sale or K for sale of stock.

 

Directors

Limitations on Authority

Actions which require shareholders approval

1.                  amendment of Articles of Incorporation

2.                  enactment, amendment & repeal of bylaws

3.                  issuance of stock

4.                  calling of shareholders meetings

5.                  approval of merger and consolidation plans

6.                  sale of corporation assets outside of regular course of business

 

 

Hawaiian International Finances, Inc. v. Pablo

488 P.2 1172 (1971)

 

Duty of Care

 

Duty of Loyalty

 

Shareholders Meetings

 

Proper notice must be given

Type of Notice must vary depending on the size

 

Make a determination which individuals are entitled to receive Notice of the meeting set a record date

 

1.                  Record date fixed in t he bylaws or resolution by Board of Directors all shareholders on the record date are entitled to notice of the meeting and to vote at that meeting.  Purchase stock after the record date but  before the meting, you are not entitled to a notice function of necessity.  Once record date is send, the corporation prepares a list of shareholders they are entitled to notice WITH VOTING RIGHTS.  Certain stock classes are not entitled to receive a notice (non-voting rights)  this typically involves the person responsible for processing all stock transfers.  May be talking about the corporate secy.  often delegated to as the TRANSFER AGENT.  An agent appointed to oversee all transfers of stock including the surrender of old stock certificates, the issuance of new certificates, and to maintain and up to date record of all shareholders.

2.                  Formal notice will include the date, time, place and purpose of the meeting.

3.                  MBCA requires that notice be given no more than 60 days and no fewer than ten days before the meeting date. 

4.                  Individual responsible for mailing the notice will prepare an affidavit of mailing

5.                   

 

Voting at shareholders Meetings

 

 

Acting at all times interest on behalf of the corporation and its shareholders unhampered by personal pecuniary gain.

 

Shareholders that have a common interest may decide to form a Voting Trust

Voting trust is an agreement among shareholders and a trustee whererby rights to vote on the stock of the participating shareholders are transferred to the trustee and all other rights in the stock are retained by the shareholders. 

 

Criteria of a voting trust

1.                  grant of voting rights for an indefinite period of time

2.                  acquisition of voting control (common purpose of the trust) of the corporation is the common purpose of the trust

3.                  voting rights are separated from the other attributes of stock ownership different from placing  - we must relinquish some rights of control such as legal title or the benefits (trust fund for children) where I can retain control of the legal title (equitable title and legal title)  TRUST AGREEMENT is created to create this trust specifically granting rights to the trustee

 

Tuesday May 6, 2003 Corporate Law Two Day one

 

Records:

 

1.                  Current names and addresses of all partners

2.                  a copy of the certificate of Ltd. p/s

3.                  copies of tax returns for the past three years

4.                  copies of p/s agreements

5.                  copies of financial statements for prior 3 years

 

        Designation for service of process

        Registered Agents (Optional)

        Effective Date (Optional)

        Liability of Certain Members

        Signed

        Fee $200

 

LLC

 

        Organizers prepares and signs and files Articles of Incorporation w/dos

        Written operating agreement

 

Articles caption LLC, L.L.C or LLC

Name

Office

Date of Dissolution (optional)

 

Management of the Corporation

        shareholders rights and responsibilities (shareholders own at least one share of stock and are considered a co-owner)

        relationship b/w shareholders and corporation is contractual and separate from other shareholders/corporate relationship (i.e., employment agreements, loan agreements)

        A shareholder may be an individual or a business entity.

        Usually there are no qualifications to be a shareholder (exceptions: s corporation)

        may be individual or business entity exceptions is S Corporation

 

Preemptive Rights

Give a shareholder an opportunity to protect their position with a corporation by granting to shareholders the right to purchase newly issued shares in an amount proportionate to their current stock ownership.  The shareholders get first crack).  These rights are often waived in the Articles of Incorporation.  There are no rights unless and to the extent granted in the Articles of Incorporation.

 

        no preemptive rights granted unless and to the extent granted in the Articles of Incorporation.  If you enable existing shareholders to purchase all of the rights, then the stock price stays the same. 

 

Shareholders right to inspect corporation records

 

Rights to inspect are going to vary rights found in the statutes of the state of incorporation or domicile.

 

Shareholders are entitled to inspect and copy minutes, accounting and shareholder records.  To exercise these rights, the shareholder must give the corporation five business days notice and the inspection must take during regular business hours.  The demand to inspect must be made in good faith and for a proper purpose.  The reason must be stated in the notice.  

 

Pillsbury v. Honeywell, 191 N.W.2d 406

 

Supreme Court of Minnesota.

STATE of Minnesota ex rel. Charles A. PILLSBURY, Appellant,

v.

 

HONEYWELL, INC., Respondent.

No. 42541.

Oct. 22, 1971.


Mandamus action to compel corporate defendant to produce its original shareholder ledger, current shareholder ledger, and all corporate records dealing with weapons and ammunitions manufacture. From an order of the District Court, Hennepin County, Luther Sletten, J., denying all relief prayed for the petitioner appealed. The Supreme Court, Kelly, J., held, inter alia, that a stockholder who bought shares in corporation for sole purpose of bringing suit to compel production of corporate books and records, who was motivated by preexisting social and political beliefs that corporation should not be manufacturing ammunition to be used in Vietnam war, and who had no concern for economic well being of corporation did not have a proper purpose germane to his interest as a stockholder and hence could not compel production of corporation's shareholder lists or business records.
Affirmed.

 

A stockholder who bought shares in corporation for sole purpose of bringing suit to compel production of corporate books and records, who was motivated by preexisting social and political beliefs that corporation should not be manufacturing ammunition to be used in Vietnam war, and who had no concern for economic well being of corporation did not have a proper purpose germane to his interest as a stockholder and hence could not compel production of corporation's shareholder lists or business records.[cm1] 

 

        Activism person purchases 100 shares of Honeywell stock to change Honeywell policy of manufacturing weapons

        Plaintiff demands that Honeywell produce it shareholders ledger, address and number of share, both original and current list and all corporation records involved with munitions and manufacturing weapons Honeywell refused. 

        Pillsbury v Honeywell, Inc. 191 N.W.2d 406

        In deposition, plaintiff details it position regarding war and Honeywells involvement and his hopes of altering Honeywells policy

He argues that the records are necessary to ensure accuracy of information in the files and to solicit proxies.  The courts holding is in favor of Honeywell and they state that :a proper purpose for the inspection of corporation records is concerned with return on investment 

 

Plaintiffs sole interest in Honeywell was to change their policy on munitions manufacturing, not on the return on investment. 

 

Personal Liability of shareholders

 

  • Two common exceptions

1.                  piercing the corporate veil and hold the shareholders personally liable

2.                  personal guarantees

Both of these exceptions illustrate a disregard for the corporate entity which provides limited liability protection.

 

Another exemption, but very uncommon is

Tortuous acts of a corporation -

  • shareholders may be liable for tortuous acts of the corporation if it can be proven that the shareholders were participating in the commission of the act.  The courts would go after the shareholders who are on the Board of Directors and not the small shareholder. 

 

Personal liability of directors

 

 

You cannot hold responsible a director who makes a bad business decision, if he had the best interest of the corporation.

 

Business Judgment Rule - Courts recognize that a directors decisions involve a certain amount of risk and that informed good faith decisions can go bad.  The rule states that a directors corporate decision which involves no self-dealing or personal interest will not subject him to personal liability unless:

 

A directors corporation decision which involves not self interest will not subject him to personal liability unless:

 

1.                  director did not exercise due care to obtain relevant and available facts before voting to authorize an action. 

2.                  unless the director voted to authorize even though they didnt reasonably believe or could not have reasonably believed that it was in the best interest of the corporation

3.                  or in some other way, the transaction was not in good faith.

 

The above represents a breach of fiduciary duty of care and/or our duty of loyalty

 

Unauthorized Acts

When a director acts beyond the scope of their personal authority, they may be held liable for those losses incurred by such actions.  They may have to pay back losses from their personal assets. 

 

Negligence

They are going to be held personally liable if they engaged in negligent acts that caused personal injury or acts to the corporation or to a third party. 

 

Fraud and other illegal acts

Individual acts or acts commited by the corporation with their knowledge.  However, if the director is not aware, the reasonableance standard question is applied.

This includes acts committed by them or with their knowledge. 

 

Shareholders Actions the ability to take legal action (3 types)

1.                  individual shareholder action apply when an individual shareholders is injured by the acts of a corporation may bring suit for damages against the corporation  - situations where the alleged wrong of the corporation affect the shareholder individually and not other shareholders.  This is a personal claim, similar to any action that any individual could bring against the corporation.

Shareholders breach of employment agreement, etc.

 

2.                  representative actions action where the parties are too numerous to be joined and one party or a few are permitted to bring the action on behalf of the group this represents personal claims this cause of action belongs to the shareholders personally

3.                  derivative action action brought by one or more shareholders to enforce a corporation right or remedy a wrong in cases where the corporation fails to take appropriate action for its own protection. 

Fraudulent transaction that was completed or contemplated which will result in serious injury to the corporation or to the interests of the corporation   This cause of action belongs to a corporation.  The corporation can sue itself (class action suits).  The following must be present for a shareholder to maintain a derivative action.

1.                  There must be some action or threatened action of the Board of Directors which is beyond their authority, or

2.                  they have a fraudulent action completed or contemplated which will result in serious injury to the corporation or to the interest of the shareholders.

3.                  an action by the board or a majority of them in their own interests which is destructive to the corporation or to the shareholders.

4.                  an action by the majority of the shareholders themselves in oppressively and illegally acting in the name of the corporation which is in violation of the rights of other shareholders

 

 

Demand MBCA Section 7.42

 

This represents an order to avoid unnecessary litigation statutes require shareholders to make a good faith attempt to prompt the corporation to take action on its own behalf before a derivative action is filed.  In order to avoid litigation, statutes require shareholders to make a good faith attempt to prompt the corporation to take action on its own behalf

 

No shareholders may commence a derivative proceeding until: 

1.                  a written demand has been made upon the corporation to take suitable action

2.                  90 days have expired from the date of demand unless a shareholder has earlier been notified that the demand has been rejected; or

3.                  irrepairable damage/injury would result by waiting 90 days.

 

Officers

 

Corporations have officers with the title, duties and responsibilities assigned to them by the statutes of the state of domicile, Articles of Incorporation and the bylaws.  Corporation are given great latitude in the number, title and duties of its officers.  These issues are usually addressed in the bylaws.  Statutes often require that one officer be appointed to prepare the minutes of the directors meetings and the shareholders meetings. 

 

Officers common titles and duties:

 

1.                  CEO -  actively manages the business of the corporation , directly/indirectly supervise all other officers, agents and authorities.  Presides over all meetings of shareholders and Board of Directors hard to overcome that reasonableness test

2.                  President specific duties assigned to the president acting as a backup,

3.                  Chairman of the Board shall be a member of the Board of Directors principal duties are to preside over each meeting of the Board of Directors.  Keeps in close touch with members, ceo and pres.; closely involved with the admin of corporation; advises and counsels CEO and/or pres.

4.                  Vice Pres shall perform duties of pres during his absence

5.                  CFO is the custodian of funds, securities and property of the corporation  - shall give and receive receipts of monies due and payable to the corporation   also responsible for depositing any money  - treasurer shall have such duties in the absence of CFO; in the bylaws

6.                  Secretary shall be responsible for the prompt and correct recording of all proceedings of all Board of Directors and supervises all publications of the reports, studies and other correspondences of the Board of Directors.

 

 

 

The bylaws will contain the names of officers, description of duties, methods of electing and removing officers and any special qualifications will be listed.  Compensation issues may also be stated in the bylaws.  Description of duties of offices

 

Method of electing officers

Method of any special qualifications for officers

Compensation issues are addressed in the bylaws

 

Election term of officers

 

Personal liability of officers

 

Officers are held to the same standard of conduct at directors. 

Breaches of fiduciary

Breaches of care

Breaches of loyalty can subject them to liability

 

Mergers and Acquisitions

 

Merger  combination of two or more corporations whereby one of the corporations survives and one or more are absorbed and cease to exist resulting in the merger corporation.  All assets, liabilities and obligations of the merging corporation are transferred to the surviving corporation.  Do not buy the corporation but just the assets and name.  Maintain the corporation entity. 

 

Effect of a Merger:

 

1.                  the separate existence of every merging corporation ceases

2.                  title to real or other property is vested in surviving corporation w/o impairment

3.                  surviving corporation takes on all liabilities of the corporations property to the merger

4.                  proceeding against a party to the merger by substituting the surviving corporation for the merging corporation

5.                  Articles of Incorporation of surviving corporation must be amended if necessary (there may be changes o officers, etc.)

6.                  the shares of each corporation party to the merger are converted into shares, obligations or other securities of the surviving corporation.

 

 

Shareholders of the merging corporation will revcieve shares in the new corporation in exchange of their old stock certificates.  The Corporation is allowed to buyout of the shares of the shareholders.

 

Mergers b/w subsidiaries and parents

 

Upstream Merger sub into parent may be eligible for a short form merger.  Obviously this type of merger is simplified.  shareholders approval of the subsidiary is not necessary when the parent owns at least 90%.  Examine the eligibility for short-form mergers.

 

Downstream Merger  - when the parent company merges into the subsidiary.  Same issues as above. 

 

Share Exchanges

 

Acquisition a share exchange is a transaction whereby one corporation acquires all of the outstanding shares of another corporation by an exchange that is compulsory on the shareholders of the target corporation. 

 

Target corporation  may receive shares or cash in exchange for shares.  Both corps survive. With target corporation becoming a subsidiary of the acquiring corporation.   This differs from a merger..

 

Consolidations where you are merging two or more corporations into a new corporation and results in the subsequent disappearance of the merging corporations. 

 

Celotex Corp. v. Pickett 490 So.2d 35 takes the bad will along with the goodwill  exchanges and corporate interest.

 

 


 

Wednesday April 7, 2003 Corporate Law

 

Share exchange

 

Merger

 

State and Federal Law affecting Mergers and Share Exchanges

 

The following issues are addressed by federal/state statute:

 

1.                  requirements for the plan of merger and the plan of share exchange.  This is the process that a corporation must undergo

The Merger is effectuated by filing a Certificate of Merger, setting forth the plan, the effective date, the provisions for the new C/I, and the manner of authorization with respect to each constituent corporation.  See B.C.L. Section 904.  The Merger is effective after filing with the Secretary of State and payment of the filing fees.  B.C.L. 906.  The surviving corporation is required to file a copy of such certified certificate in the County Clerks Office in each county in which an office of the constituent corporation is located

2.                  Method for adopting the plan the process

3.                  Requirements for the AoM or the Arts of share exchange filing subject to statutory requirements

4.                  Requirements for filing the AoM or AoSE

5.                  Provisions regarding the effect of a Merger or Exchange anti-trust considerations, federal reporting requirements, employment

6.                  Provisions for short term mergers

7.                  Provisions for dissenting shareholders rights

 

Federal Reporting Requirements

 

  • Federal Securities Requirements
  • IRS Codes
  • Anti-trust Laws

 

  1. Procedures

 

Depends on the type of transaction and the parties involved.

 

If we have mergers between related parties, then the procedure will be much easier.  (subsidiaries)  A lot of extra due diligence work may not be required.

 

  1. Negotiations and the Letter of Intent

a)      This will involve meeting and preliminary negotiations between the parties.  This could be an act of the Board of Directors, the agents must be authorized individuals.  Depends on the management structure of that corporation.  Empowerment of one person will not happen.  Corporation authorizes a committee, or Board of Directors to undergo these negotiations.

b)      If these negotiations are successful, then this will lead to the creation of the Letter of Intent.  This is typically a short document of a few pages in length.  This sets for the preliminary understandings and intentions between the parties with regard to this transaction.  Example, is this possible, what are we going to look from you when this goes through?

c)      This letter may contain contingencies such as dates and deadlines that must occur in order for the party to undergo the manifestation of intent.

d)      Purpose of this letter of intent is to demonstrate the seriousness of the parties.

 

  1. Plan of the Merger this is required by statute

 

Sets forth the terms of agreement between the parties.  The plan must set forth the following:

  1. The names of each corporation planning to merge and the name of the surviving corporation.
  2. The terms and conditions of the merger. 
  3. The manner and basis of converting the shares into shares, obligations and other securities of the surviving corporation or force into cash or other property

 

The Plan often includes:

 

  • Provisions for amendment of the Articles of Incorporation
  • Date of the agreement
  • The name and authorized capitalization of each corporation listing all of the parties to the transaction, stock values, etc.  Becomes particularly important for transactions that do not require shareholders approval.
  •  Name, purpose, principal office, number of directors and the capital stock of the surviving corporation is required.
  • Provisions acknowledging the transfer of rights, property and liabilities of merging corporation to surviving corporation.  Due diligence complexity will be great for larger corporations.
  • Recitals by each Board of Directorss that they believe the merger to be in the best interest of the corporation to merge (support). 
  • Provisions for amending the bylaws of survivor voting rights, shareholders must make sure that they are adequately represented in the new corporation and this depends on the strength of the parties. 
  • Provisions for dissolving merging corporations winding up the affairs of the business
  • Provisions for filing the AoM corporation
  • Closing and effective date of the merger
  • Provisions for abandoning the merger prior to completions

 

With the exception of the upstream/downstream, all of these conditions must be approved by the Board of Directors and shareholders of each corporation

 

Director and Shareholders Approval

 

1.Procedure for obtaining shareholders approval

1.         bod recommeds the plan shareholders in a proposal of merger

2.         Each shareholders, whether entitled to vote or not, must be notified of the shareof merger and the plan olders meeting pursuant to statute.  It must state that the purpose of the meeting is to consider the plan of merger and must include a summary of the plan.

3.         Must bee approved by a majority of the shareholders unless oltherwise provided by a certificate of incorporation or the bylaws.  It is standard to have a super majority to accomplish this task.  \

 

Approval of the shareholders of the surviving corporation is not always required. When it is not required is when the position and rights of the shareholders of the surviving corporation are not significantly affected by the merger.  This often allows the Board of Directors of a largely held corporation to have a meeting without shareholders approval. 

 

Dissenting Shareholders

 

Shareholders right to dissent refers to their right to object to certain extraordinary actions of the corporation and to obtain fair value of their shares by the corporation. 

 

Any shareholders entitled to vote on the planned merger or shareholders of subsidiaries have the right to dissent

 

The rights to dissent also applies to situations where the Articles of Incorporation are amended in a way that materially and adversely affects the right of the shareholders.  If the shareholders challenges the value on his shares by a corporation, he may file for a judicial appraisal of a proceeding. 

 

Articles of Merger - Must be filed w/dos

Must set forth the following:

 

1.                  must consist of mainly the plan of merger

2.                  Statement regarding approval of the plan by the shareholders including the number of votes in favor and against.

3.                  Stateemtn fo shareholders approval not required if that is the case

 

Share Exchange:

 

Plan of Exchange  must set forth:

 

1.                  Name of the corporation whose shares will be acquired and the name of the acquiring corporation

2.                  Terms and conditions of the exchange

3.                  the manner and basis for exchanging the shares to be acquired for shares, delegations or other securities of the acquiring corporation or for cash or other property. 

Optional provisions are going to be similar to the merger such as the name, date, purpose, authorized capitalization.  A lot of this will not be required.  rights for property and liabilities are going to remain in the domain of the target corporation and will not be an issue here.  Recitals can be included.  Provisions for amending the bylaws may not be necessary.  For dissolving, will not be necessary.  Abandonment will be necessary.  Bylaw modification might or may not be there. 

 

Provisions for continuing the target corporation as a subsidiary.  For continuing the target corporation as a subsidiary this provision will be there. 

Director and shareholders approval rights of the planned exchange would be the same as for a merger. 

 

Board of Directors is recommended by and approved by a majority of shareholders unless altered by statute, certificate or Articles of Incorporation or bylaws

 

Fair Merger Act

Level of federal approval

 

Dissenting shareholders

 

Share exchange, if properly approved, is binding on all shareholders.  Even if I do not vote and the corporation does, I still must comply with the results of the vote; dissenters have a right to dissent to the share exchange, receive fair value for their shares and withdraw from the corporation. 

 

Articles of Share Exchange

 

After the plan of share exchange has been adopted, the AoSE must be filed with the dos.  The articles must set forth:

  • the Plan of share exchange and
  • statement regarding approval by shareholders and the date

 

 

Due Diligence and Pre-closing Matters

 

The parties participating in the share exchange must use DUE DILIGENCE to ascertain the validity of the statements and the plan

 

DUE DILIGENCE work involves a thorough review of the documentation supporting the information in the plan as well as onsite investigations or inspections of real estate, buildings, inventory and other assets. 

 

Due diligence also involves inspections of the corporation records and books.  A list of documents that are exchanged and reviewed would consist of:

 

1.                  Proof of corporation existence and the good standing of each corporation

2.                  Collect copies of corporate minute books including the Articles of Incorporation, bylaws and minutes

3.                  Examine the stock ledger and certificates

4.                  Examine financial statements

5.                  tax returns and the results of tax audits, relationship between the assets and stock

6.                  leases and or titles to property

7.                  lists of equipment

8.                  Paperwork concerning their patents, trademarks and copyrights make sure that they are registered; assignments, trademarks, any department that has a research and development department with patents that are filed.  When we buy the intellectual rights to a corporation, we want to make sure that we are getting what we believe exist in the corporation that are being merged. 

9.                  pending litigation

10.              Copies of employment and non-competition agreements

11.              Description of employee benefits

12.              U.C.C searches on liens and priorities

13.              loan agreements

14.              accounts payable/receivable

15.              customer lists

16.              ascertaining whether any outside parties are required to consent to the transaction contracts that exists between two corporations and a third party.  Parties must

 

Closing the Merger and Share Exchange Transaction  - closing date must be specified and i

  1. at the closing, the shares of stock change hands
  2. assignments of Ks and transfers of property take place.

 

 

This meeting is attended by the key officers of each corporation.  By the corporation counsel, third party.  This is the execution and exchange of all documents referred to and required by the plan. 

 

Documents typically required:  Merger Closings

 

SE requirements:

 

  1. Articles of Merger, including any necessary articles of amendments to the Articles of Incorporation.  Tomorrow-we will discuss the aemending the Articles of Incorporation
  2. The instruments of signing and transferring the appropriate shares of stock of each corporation
  3. The issuance of other instruments or deeds that assign or transfer the deeds of real property. 
  4. The issuance of new stock certificates
  5. The instruments that assign and transfer equipment, vehicles and other property.
  6. Assignments of Patents, trademarks and copyrights
  7. Instruments assigning and transferring Bank Accounts signatures and officers must change on these accounts
  8. Appropriate SEC filings
  9. Copies of Board of Directors and shareholders resolutions approving the transactions

 

Documents required for Share Exchanges similar to merger closings, more emphasis is placed on the transfer of ownership on the target corporation.  Here, we are dealing with the issuance of stock certificates that represent the ownership of target corporation by the acquiring corporation.  The documents create a parent-subsidiary relationship.

 

shareholders get stock certificates and possibly the officers and directors may remain in place in order to operate that corporation. 

 

 

Post Closing Matters

 

After the closing of this transaction, there are several matters that still need to be addressed such as the appropriate federal and state documents and the following:

 

  1. Organize new minutes books and stock ledgers
  2. Filing of the deed to exercise the transfer of proerty
  3. Changing the titles to all movable pieces of property (motor vehicles, etc.)
  4. Lease Assignments
  5. Other such tasks

 

Certificate of Change

Right to Dissent

Qualification of a foreign Corporation

 


 [cm1]No constitutional or statutory right to jury trial exists where there is no issue of fact.
**407 Syllabus by the Court
*322 1. In determining the right of a shareholder to inspect corporate books and records, there is no need to decide whether the law of the state of incorporation or local law applies when the test which is determinative of that right in both states is identical.
2. A stockholder who bought shares in a corporation for the sole purpose of bringing a suit to compel production of corporate books and records, who is motivated by preexisting social and political beliefs, and who has no concern for the economic well-being of the corporation, does not have a proper purpose germane to his interest as a shareholder and, therefore, cannot compel production of a corporation's shareholder lists or business records.
3. A trial court need not accept a shareholder's allegation that he has a proper purpose, but may make an independent assessment of the shareholder's motives.
**408 4. Where a shareholder is motivated solely by preexisting social and political beliefs and has no economic concern for the well-being of the corporation or himself, the fact that he seeks to achieve his political objectives by electing directors with similar beliefs will not entitle him to inspection.
5. In a mandamus action, it is not reversible error for the trial court to refuse to strike respondent's answer although it preceded the issuance of an alternative writ.
*323 6. In a mandamus action where the trial court permits respondent's answer to precede the issuance of an alternative writ, the cause of action has commenced, and respondent may serve notice of a deposition without a showing of cause.
7. Petitioner in a mandamus action is not entitled to a jury trial if the trial court finds as a matter of law from the deposition that no grounds for issuance of the writ exist.
John Remington Graham, Minneapolis, for appellant.
Dorsey, Marquart, Windhorst, West & Halladay and Bernard G. Heinzen and Robert A. Heiberg, Minneapolis, for respondent; Sigurd Ueland, Jr., Honeywell, Inc., Minneapolis, of counsel.
Heard and considered en banc.

OPINION


KELLY, Justice.
Petitioner appeals from an order and judgment of the district court denying all relief prayed for in a petition for writs of mandamus to compel respondent, Honeywell, Inc., (Honeywell) to produce its original shareholder ledger, current shareholder ledger, and all corporate records dealing with weapons and munitions manufacture. We must affirm.
The issues raised by petitioner are as follows: (1) Whether Minnesota or Delaware law determines the right of a shareholder to inspect respondent's corporate books and records; (2) whether petitioner, who bought shares in respondent corporation for the purpose of changing its policy of manufacturing war munitions, had a proper purpose germane to a shareholder's interest; (3) whether the respondent in a mandamus action may answer before the issuance of an alternative writ; (4) whether a deposition
*324 may be considered by the trial court after the filing of a petition for an alternative writ of mandamus and an answer to the petition; and (5) whether petitioner was improperly denied a jury trial where the trial court found all questions of fact answered by the pleadings and petitioner's deposition.
Petitioner attended a meeting on July 3, 1969, of a group involved in what was known as the 'Honeywell Project.' Participants in the project believed that American involvement in Vietnam was wrong, that a substantial portion of Honeywell's production consisted of munitions used in that war, and that Honeywell should stop this production of munitions. Petitioner had long opposed the Vietnam war, but it was at the July 3rd meeting that he first learned of Honeywell's involvement. He was shocked at the knowledge that Honeywell had a large government contract to produce anti-personnel fragmentation bombs. Upset because of knowledge that such bombs were produced in his own community by a company which he had known and respected, petitioner determined to stop Honeywell's munitions production.
On July 14, 1969, petitioner ordered his fiscal agent to purchase 100 shares of Honeywell. He admits that the sole purpose of the purchase was to give himself a voice in Honeywell's affairs so he could persuade Honeywell to cease producing munitions. Apparently not aware of that purpose, petitioner's agent registered the stock in the name of a Pillsbury family nominee--Quad & Co. Upon discovering
**409 the nature of the registration, petitioner bought one share of Honeywell in his own name on August 11, 1969. In his deposition testimony petitioner made clear the reason for his purchase of Honeywell's shares:
'q * * * (D)o I understand that you requested Mr. Lacey to buy these 100 shares of Honeywell in order to follow up on the desire you had to bring to Honeywell management and to stockholders these theses that you have told us about here today?
'A Yes. That was my motivation.'
*325 The 'theses' referred to are petitioner's beliefs concerning the propriety of producing munitions for the Vietnam war.
During July 1969, Subsequent to the July 3, 1969, meeting and after he had ordered his agent to purchase the 100 shares of Honeywell stock, petitioner inquired into a trust which had been formed for his benefit by his grandmother. The purpose of the inquiry was to discover whether shares of Honeywell were included in the trust. It was then, For the first time, that petitioner discovered that he had a contingent beneficial interest under the terms of the trust in 242 shares of Honeywell.
Prior to the instigation of this suit, petitioner submitted two formal demands to Honeywell requesting that it produce its original shareholder ledger, current shareholder ledger, and all corporate records dealing with weapons and munitions manufacture. Honeywell refused.
On November 24, 1969, a petition was filed for writs of mandamus ordering Honeywell to produce the above mentioned records. In response, Honeywell answered the petition and served a notice of deposition on petitioner, who moved that the answer be stricken as procedurally premature and that an order be issued to limit the deposition. After a hearing, the trial court denied the motion, and the deposition was taken on December 15, 1969.
In the deposition petitioner outlined his beliefs concerning the Vietnam war and his purpose for his involvement with Honeywell. He expressed his desire to communicate with other shareholders in the hope of altering Honeywell's board of directors and thereby changing its policy. To this end, he testified, business records are necessary to insure accuracy.
A hearing was held on January 8, 1970, during which Honeywell introduced the deposition, conceded all material facts stated therein, and argued that petitioner was not entitled to any relief as a matter of law. Petitioner asked that alternative writs of mandamus issue for all the relief requested in his petition. On April 8, 1970, the trial court dismissed the petition, holding that
*326 the relief requested was for an improper and indefinite purpose. Petitioner contends in this appeal that the dismissal was in error.
[1] 1. Honeywell is a Delaware corporation doing business in Minnesota. Both petitioner and Honeywell spent considerable effort in arguing whether Delaware or Minnesota law applies. The trial court, applying Delaware law, determined that the outcome of the case rested upon whether or not petitioner has a proper purpose germane to his interest as a shareholder. Del.Code Ann. tit. 8, s 220 (Supp. 1968). This test is derived from the common law and is applicable in Minnesota. See, Sanders v. Pacific Gamble Robinson Co., 250 Minn. 265, 84 N.W.2d 919 (1957).[FN1] Minn.St. c. 300, upon which petitioner relies, applies only to firms incorporated under that chapter. We need not rule on whether the lower court applied the right state law since the test used was correct.

FN1. In Sanders v. Pacific Gamble Robinson Co., 250 Minn. 265, 84 N.W.2d 919 (1957), the court referred to Minn.St. 300.32 but did not apply it since the corporation was foreign.



Under the Delaware statute the shareholder must prove a proper purpose to inspect
**410 corporate records other than shareholder lists. Del.Code Ann. tit. 8, s 220(c) (Supp.1968). This facet of the law did not affect the trial court's findings of fact. The case was decided solely on the pleadings and the deposition of petitioner, the court determining from them that petitioner was not entitled to relief as a matter of law. Thus, problems of burden of proof did not confront the trial court and this issue was not even raised in this court.
2. The trial court ordered judgment for Honeywell, ruling that petitioner had not demonstrated a proper purpose germane to his interest as a stockholder. Petitioner contends that a stockholder who disagrees with management has an absolute right to inspect corporate records for purposes of soliciting proxies. He would have this court rule that such solicitation is per se a 'proper purpose.' Honeywell argues that a 'proper purpose'
*327 contemplates concern with investment return. We agree with Honeywell.
[2] This court has had several occasions to rule on the propriety of shareholders' demands for inspection of corporate books and records. Minn.St. 300.32, not applicable here, has been held to be declaratory of the common-law principle that a stockholder is entitled to inspection for a proper purpose germane to his business interests. While inspection will not be permitted for purposes of curiosity, speculation, or vexation, adverseness to management and a desire to gain control of the corporation for economic benefit does not indicate an improper purpose.[FN2]

FN2. Nationwide Corp. v. Northwestern Nat. Lefe Ins. Co., 251 Minn. 255, 87 N.W.2d 671 (1958); Sanders v. Pacific Gamble Robinson Co., Supra; State ex rel. G. M. Gustafson Co. v. Crookston Trust Co., 222 Minn. 17, 22 N.W.2d 911 (1946); State ex rel. Boldt v. St. Cloud Milk Producers' Assn., 200 Minn. 1, 273 N.W. 603 (1937); State ex rel. Humphrey v. Monida & Yellowstone Stage Co., 110 Minn. 193, 124 N.W. 971 (1910). See, Annotation, 15 A.L.R.2d 11.



Several courts agree with petitioner's contention that a mere desire to communicate with other shareholders is, per se, a proper purpose.
Lake v. Buckeye Steel Castings Co., 2 Ohio St.2d 101, 206 N.E.2d 566 (1965). This would seem to confer an almost absolute right to inspection. We believe that a better rule would allow inspections only if the shareholder has a proper purpose for such communication. This rule was applied in McMahon v. Dispatch Printing Co., 101 N.J.L. 470, 129 A. 425 (1925), where inspection was denied because the shareholder's objective was to discredit politically the president of the company, who was also the New Jersey secretary of state.
The act of inspecting a corporation's shareholder ledger and business records must be viewed in its proper perspective. In terms of the corporate norm, inspection is merely the act of the concerned owner checking on what is in part his property. In the context of the large firm, inspection can be more akin to a weapon in corporate warfare. The effectiveness of the weapon is considerable:
*328 'Considering the huge size of many modern corporations and the necessarily complicated nature of their bookkeeping, it is plain that to permit their thousands of stockholders to roam at will through their records would render impossible not only any attempt to keep their records efficiently, but the proper carrying on of their businesses.'
Cooke v. Outland, 265 N.C. 601, 611, 144 S.E.2d 835, 842 (1965).
See, also,
Matter of Pierson, 28 Misc. 726, 59 N.Y.S. 1003 (Sup.Ct.1899), affirmed, 44 App.Div. 215, 60 N.Y.S. 671 (1899). Because the power to inspect may be the power to destroy, it is important that only those with a bona fide interest in the corporation enjoy that power.
That one must have proper standing to demand inspection has been recognized by
**411 statutes in several jurisdictions.
[FN3] Courts have also balked at compelling inspection by a shareholder holding an insignificant amount of stock in the corporation.[FN4]

FN3. See, e.g., Ark.Stat.Ann. s 64--312 (1947); D.C.Code Ann. s 29--920 (1967); Fla.Stat. s 608.39 (1969), F.S.A.; Ill.Rev.Stat. c.

32, s 157.45 (1967); La.Rev.Stat. s 12:103 (Supp.1970); Maine Rev.Stat.Ann. tit. 13, s 373 (1964); Mich.Comp.Laws Ann. s 450.45 (1967); Nev.Rev.Stat. s 78.105 (1970); N.J.Stat.Ann. s 14A:5--28 (1969); N.Y. Business Corporation Law s 624 (McKinney's Consol. Laws, c. 4, 1963); Model Bus.Corp. Act Ann. s 52 (1971).

 

FN4. See, People ex rel. Hunter v. National Park Bank of New York, 122 App.Div. 635, 107 N.Y.S. 369 (1907); Matter of Pierson, 28 Misc. 726, 59 N.Y.S. 1003 (Sup.Ct.1899), affirmed, 44 App.Div. 215, 60 N.Y.S. 671 (1899).



Petitioner's standing as a shareholder is quite tenuous. He only owns one share in his own name, bought for the purposes of this suit. He had previously ordered his agent to buy 100 shares, but there is no showing of investment intent. While his agent had a cash balance in the $400,000 portfolio, petitioner made no attempt to determine whether Honeywell was a good investment or whether more profitable shares would have to be sold to finance the Honeywell purchase. Furthermore, petitioner's agent had the power to sell the Honeywell shares without his consent. Petitioner also had a contingent beneficial interest
*329 in 242 shares. Courts are split on the question of whether an equitable interest entitles one to inspection. See 5 Fletcher, Private Corporations, s 2230 at 862 (Perm. ed. rev. vol. 1967). Indicative of petitioner's concern regarding his equitable holdings is the fact that he was unaware of them until he had decided to bring this suit.
[3] Petitioner had utterly no interest in the affairs of Honeywell before he learned of Honeywell's production of fragmentation bombs. Immediately after obtaining this knowledge, he purchased stock in Honeywell for the sole purpose of asserting ownership privileges in an effort to force Honeywell to cease such production. We agree with the court in Chas. A. Day & Co. v. Booth, 123 Maine 443, 447, 123 A. 557, 558 (1924) that 'where it is shown that such stockholding is only colorable, or solely for the purpose of maintaining proceedings of this kind, (we) fail to see how the petitioner can be said to be a 'person interested,' entitled as of right to inspect * * *.' But for his opposition to Honeywell's policy, petitioner probably would not have bought Honeywell stock, would not be interested in Honeywell's profits and would not desire to communicate with Honeywell's shareholders. His avowed purpose in buying Honeywell stock was to place himself in a position to try to impress his opinions favoring a reordering of priorities upon Honeywell management and its other shareholders. Such a motivation can hardly be deemed a proper purpose germane to his economic interest as a shareholder.[FN5]

FN5. We do not question petitioner's good faith incident to his

political and social philosophy; nor did the trial court. In a wellprepared memorandum, the lower court stated: 'By enumerating the foregoing this Court does not mean to belittle or to be derisive of Petitioner's motivations and intentions because this Court cannot but draw the conclusion that the Petitioner is sincere in his political and social philosophy, but this Court does not feel that this is a proper forum for the advancement of these political-social views by way of direct contact with the stockholders of Honeywell Company or any other company. If the courts were to grant these rights on the basis of the foregoing, anyone who has a political-social philosophy which differs with that of a company in which he becomes a shareholder can secure a writ and any company can be faced with a rash and multitude of these types of actions which are not bona fide efforts to engage in a proxy fight for the purpose of taking over the company or electing directors, which the courts have recognized as being perfectly legitimate and acceptable.'



*330
[4] 3. The fact that petitioner alleged a proper purpose in his petition will not **412 necessarily compel a right to inspection. 'A mere statement in a petition alleging a proper purpose is not sufficient. The facts in each case may be examined.' Sawers v. American Phenolic Corp., 404 Ill. 440, 449, 89 N.E.2d 374, 379 (1949). Neither is inspection mandated by the recitation of proper purpose in petitioner's testimony. Conversely, a company cannot defeat inspection by merely alleging an improper purpose.[FN6] From the deposition, the trial court concluded that petitioner had already formed strong opinions on the immorality and the social and economic wastefulness of war long before he bought stock in Honeywell. His sole motivation was to change Honeywell's course of business because that course was incompatible with his political views. If unsuccessful, petitioner indicated that he would sell the Honeywell stock.

FN6. See, Nationwide Corp. v. Northwestern Nat. Life Ins. Co., 251 Minn. 255, 87 N.W.2d 671 (1958).



We do not mean to imply that a shareholder with a bona fide investment interest could not bring this suit if motivated by concern with the long- or short-term economic effects on Honeywell resulting from the production of war munitions. Similarly, this suit might be appropriate when a shareholder has a bona fide concern about the adverse effects of abstention from profitable war contracts on his investment in Honeywell.
In the instant case, however, the trial court, in effect, has found from all the facts that petitioner was not interested in even the long-term well-being of Honeywell or the enhancement of the value of his shares. His sole purpose was to persuade the company to adopt his social and political concerns, irrespective of any economic benefit to himself or Honeywell. This purpose
*331 on the part of one buying into the corporation does not entitle the petitioner to inspect Honeywell's books and records.
[FN7]

FN7. Petitioner cites Medical Committee for Human Rights v. S.E.C., 139 App.D.C. 226, 432 F.2d 659 (1970), for the proposition that economic benefit and community service may, in the motives of a shareholder, blend together. We have ruled that petitioner does not meet this test because he had no investment motivation for his inspection demands. The Medical Committee case did not reach the merits, the court ruling only that S.E.C. actions concerning the inclusion of proxy statements are reviewable. It is interesting to note, however, that the case presents an analogous factual situation. Shareholders sought to solicit proxies to stop the Dow Chemical Company's manufacture of napalm on grounds that management had 'decided to pursue a course of activity which generated little profit * * * and actively impaired the company's public relations and recruitment activities because Management considered this action morally and politically desirable.' 139 App.D.C. 249, 432 F.2d 681. (Italics supplied.) The court, in dictum, expressed its disapproval of Dow's claim that it could use its power to impose management's personal

political and moral prejudices. It would be even more anomalous if an outsider with no economic concern for the corporation could attempt to adapt Honeywell's policies to his own social convictions.



[5] 4. Petitioner argues that he wishes to inspect the stockholder ledger in order that he may correspond with other shareholders with the hope of electing to the board one or more directors who represent his particular viewpoint. On p. 30 of his brief he states that this purpose alone compels inspection:
'* * * (T)his Court has said that a stockholder's motives or 'good faith' are not a test of his right of inspection, except as 'bad faith' actually manifests some recognized 'improper purpose'--such as vexation of the corporation, or purely destructive plans, or Nothing specific, just pure idle curiosity, or necessarily illegal ends, or Nothing germane to his interests.
State ex rel. G. M. Gustafson Co. v. Crookston Trust Co. (222 Minn. 17, 22 N.W.2d 911 (1946)) * * *.' (Italics supplied.)
While a plan to elect one or more directors is specific and the election of directors
**413 normally would be a proper purpose, here *332 the purpose was not germane to petitioner's or Honeywell's economic interest. Instead, the plan was designed to further petitioner's political and social beliefs. Since the requisite propriety of purpose germane to his or Honeywell's economic interest is not present, the allegation that petitioner seeks to elect a new board of directors is insufficient to compel inspection.
[6] 5. Petitioner contends that the trial court should have struck Honeywell's answer to the petition for the writs of mandamus since Honeywell answered before the writ was issued. According to statutory procedure, an answer is proper after the alternative writ has issued. Minn.St. 586.06. While it is clear that Honeywell did not comply with the strict dictates of the statute, the question is whether such error is cause for reversal. We do not believe so.
If the trial court had struck Honeywell's answer and issued the alternative writ, Honeywell would have answered with the same allegations as in its original answer. On the merits, the issues would have been identical and would have created the same burdens of proof. Thus, the technical error did not affect the ruling upon the merits and is thus not reversible.
[7] 6. We have stated that it was not reversible error to allow Honeywell's premature answer. It follows that the notice to take his deposition, served upon petitioner the same day as the answer, was served subsequent to the commencement of the action. See, Rules of Civil Procedure, Rule 3.01.
[8] [9] 7. Petitioner's final contention is that he was improperly denied a jury trial. The court below denied the petition for a writ after a hearing at which Honeywell appeared in opposition. In denying the petition, the court found that the facts were undisputed and that they did not necessitate a jury trial. We agree that the facts are undisputed and are susceptible to only one inference on the crucial issue in this case, namely, whether petitioner had a proper purpose germane to his economic interest as *333 a shareholder. [FN8] We have affirmed the trial court's ruling that the facts as stated by petitioner in the deposition are sufficient to deny him all grounds of relief. Thus, there was no issue to try before a jury.[FN9] The fact that Honeywell raised issues of fact in its answer is immaterial. Inconsistent defenses are always permitted. Rules of Civil Procedure, Rule 8.05(2). No constitutional or statutory right to a jury trial exists where there is no issue of fact. Rheinberger v. First Nat. Bank, 276 Minn. 194, 150 N.W.2d 37 (1967).

FN8. This court has pointed out in other cases, involving negligence, that where the facts are undisputed and susceptible of only one inference, there is no fact issue for a jury. Jorgensen v. Hawton, 281 Minn. 370, 375, 161 N.W.2d 676, 680 (1968).

 

FN9. See, Thomsen v. State, by Head, 284 Minn. 468, 170 N.W.2d 575 (1969), where plaintiff landowner brought a mandamus action in district court to compel the state to condemn his property. We held that the

mandamus court should determine whether or not there was a taking that would require an order to the state to initiate condemnation proceedings. This court stated (284 Minn. 475, 170 N.W.2d 580): 'Plaintiff argues that this procedure deprives him of his right to a jury trial. However, in an action in the nature of mandamus, such as this one, where the facts are substantially undisputed, there is no reason to impanel a jury. State ex rel. Landon v. Anding, 132 Minn. 36, 155 N.W. 1048. The mandamus court should simply have decided the ultimate question of law as to whether any property right of plaintiff's has been 'taken' or 'damaged' in the constitutional sense, based upon the undisputed facts. It is only where the facts are disputed that the mandamus court should utilize a jury to resolve the disputes preparatory to its decision on the ultimate question of law.'



The order of the trial court denying the writ of mandamus is affirmed.
MINN 1971.
STATE EX REL. PILLSBURY v. HONEYWELL, INC.
191 N.W.2d 406, 291 Minn. 322, 50 A.L.R.3d 1046

 

 

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