Chapter1 YOUR CLIENT WANTS TO GO INTO BUSINESS 1
Introduction 1
Types of Business Entities 2
Sole Proprietorship 2
Taxes 2
Sale or Disposal 3
Death 3
Advantages of a Sole Proprietorship 3
Disadvantages of a Sole Proprietorship 4
General Partnership 4
Number of Persons and Investment Needed 4
Name of General Partnership 4
Advantages of a General Partnership 4
Disadvantages of a General Partnership 5
Oral General Partnership 5
Agent of Partnership 6
Apparent Authority 6
Termination of Partnership on Death of a Partner 6
Loyalty 6
Adding Partners or Selling a Partner’s Interest 7
Assignment of Interest 7
Liability of New Partner 7
Partnership Agreement 7
Assets 8
Right to Sue and Be Sued 8
Advantages of a General Partnership 9
Disadvantages of a General Partnership 9
Limited Partnership 9
Restricted Rights of Limited Partners 10
Tax Advantages 10
Ownership of Real Property and Ability to Sue and Be Sued in Its Name 10
Uses of Limited Partnerships 10
Advantages of a Limited Partnership 11
Disadvantages of a Limited Partnership 11
Corporations 11
Limited Liability Company（LLC） 12
Limited Liability Company Members 12
Operating Agreement 12
Recording Requirements 13
Types of Limited Liability Companies 13
A Legal Entity 13
History 13
Non-Corporate Business 13
Investment in Limited Liability Companies 14
Taxation of an LLC 14
Dissolution of an LLC 14
Rule of IRS for Taxation as a Partnership 14
Limited Liability Partnership（LLP） 15
Summary 15
Chapter2 WHAT IS A CORPORATION？ 17
Duties of a Legal Secretary and/or Paralegal with Reference to a Corporation 17
Nature of a Corporation 18
Revised Model Business Corporation Act 18
Domestic，Foreign，and Alien Corporations 19
Sovereignty 19
Attributes of a Corporation 19
Taxation 19
Legal Entity 20
Creature of the State 20
Freely Transferable Stock 20
Centralized Management 20
Perpetual Existence 20
Citizenship 20
Liability of Stockholders 21
Types of Corporations 21
Public Corporation 21
Publicly Held Corporation 21
Domestic，Foreign，and Alien Corporations 22
For Profit Corporation 22
Professional Corporation 23
Nonprofit Corporation 23
Close Corporation（Closely Held） 23
Private Corporation 23
SubChapterS Corporation 23
Summary 24
Chapter3 DECIDING WHETHER AND HOW TO INCORPORATE 27
Introduction 27
Selecting a State in Which to Incorporate 27
Increase of Start-UP Costs 28
Publicly Traded Corporations 28
Delaware Corporations 28
Revised Model Business Corporation Act 29
Organization of Corporation 29
Certificate of Incorporation，Articles of Incorporation，Charter 29
Powers of a Corporation 29
Resident Agent 30
Issuance of Stock 30
Subscription Rights 30
How to Incorporate 30
Delaware Corporation Benefits 31
Promoters 31
Incorporating 31
Subscriber 32
Pre-Incorporation Transactions 33
Summary 33
Chapter4 CORPORATION STRUCTURE 36
How to Become a Shareholder 36
Management of a Corporation 37
Publicly Traded Corporations 37
Board of Directors 38
The Re*sed Model Business Corporation Act（Section 8.01（b），RMBCA） 39
Qualification of Directors（Section 8.02，RMBCA） 39
Number and Election of Directors 39
Section 8.03（a），RMBCA 39
Section 8.03（b），RMBCA 39
Section 8.03（c），RMBCA 40
Term of Office 40
Terms of Directors Generally（Section 8.05，RMBCA） 40
Resignation of Directors 40
Removal of Directors by Shareholders 40
Voting Group of Shareholders 41
Removal of Directors by Judicial Proceeding 41
Vacancy on Board（Section 8.10，RMBCA） 42
Compensation of Directors 42
Meetings of the Board of Directors 42
Action Without Meeting 43
Notice of Meeting 43
Waiver of Notice 43
Quorum and Voting 44
Section 8.24，RMBCA 44
Committees on the Board 45
Committees（Section 8.25，RMBCA） 45
Officers 46
Required Officers（Section 8.40，RMBCA） 47
Officers’Term of Office 47
Summary 47
Chapter5 DO YOU WANT A CLOSE CORPORATION？ 50
Introduction 50
Definition of a Close Corporation 52
Model Statutory Close Corporation Supplement 52
Legislative Intent-Various States-as to Close Corporations 52
Qualify and Elect Close Corporation Status-Delaware 53
Existing Corporation to Become a Close Corporation-Delaware 53
Why Would You Want a Close Corporation？ 54
Possible Future Problems Without a Close Corporation 54
Close Corporation-Advantages 54
Freeze-outs 55
How Do You Set Up a Close Corporation？ 55
Voting 55
Agreement 55
The Close Corporation Agreement Should Cover at Least the Following Areas 56
Summary 60
Chapter6 DUTIES OF OFFICERS AND DIRECTORS 65
Introduction 65
Loyalty 66
Remedies for Violation of Duty of Loyalty 66
Punitive Damages 67
Duty of Obedience 67
Duty of Diligence 67
Statutory Due Care 68
General Standards for Directors（Section 8.30，RMBCA） 68
Standards of Conduct of Officers（Section 8.42，RMBCA） 69
Self Interest（Conflict of Interest） 69
Director Conflict of Interest（Section 8.31，RMBCA） 70
SubChapterDefinitions（Section 8.60，RMBCA） 71
Judicial Action（Section 8.61，RMBCA） 72
Directors’Action（Section 8.62，RMBCA） 72
Shareholders’Action（Section 8.63，RMBCA） 73
Discussion of Sections 8.60-8.63 RMBCA（Known as SubChapterF） 73
Compensation and Waste 74
Compensation Plans for Executives 75
Incentive Stock Options 75
Non-Qualified Stock Options（Sometimes Called Nonstatutory） 76
Stock Appreciation Rights 76
Phantom Stock 76
Restricted Stock 77
Duties of Controlling Stockholders 77
Use of an Independent Committee of Directors to Shift Burden of Proof 78
Sale of a Controlling Interest 78
Purchase of a Controlling Interest 78
Sale of Corporate Office（Directorships）or Management Control Without Voting Control 79
Business Judgment Rule 79
Standards of Review and Standards of Conduct in Corporation Law 80
Liability of Directors 80
Limiting Liability of Directors（Section 2.202（b）（4），RMBCA） 80
Shareholders Liability—Optional 81
Protection of Directors 81
Summary 81
Chapter7 RAISING CAPITAL 88
Introduction 88
Blue Sky Laws 89
Debt Securities 89
Bonds 90
Debentures 90
Indentures 90
Promissory Notes 91
Corporate Power to Issue Debt Securities 91
General Powers（Section 3.02，RMBCA） 92
Callable Bonds 92
Convertible Bonds 92
Income Bonds 93
Participating Bonds 93
Secured Bonds 93
Unsecured Bonds（Debentures） 93
Equity Securities 94
Right to Issue Shares 94
Par Value 94
Articles of Incorporation（Section 2.02（b）（iv），RMBCA） 95
No Par Value 95
Issuance of Shares（Section 6.21，RMBCA） 95
Treasury Stock 96
Reports to Shareholders（Section 16.21，RMBCA） 96
Consideration Needed to Purchase Shares 96
Stocks Corporations Can Issue 97
Authorized Shares（Section 6.01，RMBCA） 97
Common Stock 98
Classes and Series of Stock 98
Preferred Stock 99
Straight Preferred Stock 99
Stock Options，Stock Rights，and Stock Warrants 99
Retained Earnings 99
Summary 100
Chapter8 SHAREHOLDER RIGHTS 104
Introduction 105
Right to Vote 105
Liability of Shareholders 105
Liability of Shareholders（Section 6.22，RMBCA） 106
Shares Represented by Certificates and Shares Without Certificates 106
Form and Content of Certificate（Section 6.25，RMBCA） 106
Shares Without Certificates（Section 6.26，RMBCA） 107
Right to Vote 107
Voting Requirements 107
Shareholders List for Meeting（Section 7.20，RMBCA） 108
Voting Power of Shares 109
To Control Voting and/or Election of Directors 109
How Directors Are Elected 110
Staggered Terms for Directors（Section 8.06，RMBCA） 110
Noncumulative Voting 110
Cumulative Voting 110
Formulas for Minority to Elect One Director 111
Defective Incorporation 111
Liability for Preincorporation Transactions（Section 2.04，RMBCA） 112
Limited Liability 112
Ultra Vires 112
Ultra Vires（Section 3.04，RMBCA） 113
Piercing the Corporate Veil 113
Commingling of Corporate Funds 114
Proxy 114
Proxy Solicitation 114
Proxies（Section 7.22，RMBCA） 115
Securities Exchange Act，1934，Rule 14（a） 115
Shareholders Right to Inspect Books and Records 116
Inspection of Records by Shareholders（Section 16.02，RMBCA） 116
Scope of Inspection Rights 117
Summary 117
Chapter9 CAPITAL AND DISTRIBUTION 123
Introduction 124
Corporate Liability 124
Low Par Stock 124
California and the RMBCA，Reference Par Value 125
Distributions（Section 1.40（6），RMBCA） 125
Dividends 125
Dividend Payments 126
Directors Liability for Declaring Improper Dividends or Distributions 127
Liability for Unlawful Distribution（Section 8.33，RMBCA） 127
Kinds of Dividends 128
Corporation’s Acquisition of Its Own Shares（Section 6.31，RMBCA） 129
Lost，Destroyed，and Stolen Certificated Securities 129
Lost，Destroyed，and Stolen Certificated Securities（Uniform Commercial Code，Section 8-405） 130
Liability and Non-Liability for Registration（UCC，Section 8-404） 130
Effect of Overissue（UCC，Section 8-104） 131
Endorsements;Instructions（UCC，Section 8-308） 131
Issuer’s Duty as to Adverse Claims（UCC，Section 403） 131
Assurance That Endorsements and Instructions Are Effective（UCC，Section 8-402） 132
Investment Securities 132
Certificated and Uncertificated Securities 133
Ownership of a Security 133
Rights and Obligations of Certificated and Uncertificated Shareholders 133
Issuer Must Register a Transfer of Security Ownership When Requested 133
Transfer of Securities 133
Transfer;Warranties 134
Unauthorized or Forged Endorsement 134
Summary 134
Chapter10 SHAREHOLDER SUITS 140
Introduction 141
Derivative Action 141
Party That Can Bring a Derivative Action 142
Derivative Proceedings，Definitions（Section 7.40，RMBCA） 142
Standing（Section 7.41，RMBCA） 142
Shareholder of a Parent Corporation 143
Creditors and Derivative Actions 143
Indispensable Party to Derivative Action 143
Difference between a Derivative and a Direct Action 143
Five Additional Areas That Give Rise to a Direct Action 144
Five Additional Areas That Give Rise to a Derivative Action 144
Continuing Wrong Theory 145
Demand（Section 7.42，RMBCA） 145
Derivative Action Without a Demand on the Board，New York State 145
Independent Committee to Investigate Basis for Derivative Action 145
Decision by Disinterested Committee 146
Dismissal（Section 7.44，RMBCA） 146
Demand on Shareholders 147
Right to Trial by Jury，Derivative Action 147
Discontinuance or Settlement（Section 7.45，RMBCA） 147
Counsel Fees for Plaintiff，Derivative Actions 148
Payment of Expenses（Section 7.46，RMBCA） 148
Security for Expenses 148
Avoiding Posting a Bond for Security 148
Strategy to Avoid Posting a Bond or Reducing the Amount 149
Indemnification 149
Settlement of Derivative.Actions 150
Shareholders Who Object to a Settlement 150
Class Actions 150
Summary 151
Chapter11 MERGERS，ACQUISITIONS，AND DISSOLUTIONS 155
Introduction 156
Merger 156
Consolidation 156
Business Acquisitions（Other Than Merger） 156
Sale of Substantially All Assets of a Corporation 157
1．In Regular Course of Business 157
2．Not in Regular Course of Business 158
Right to Dissent（Section 1302，RMBCA） 158
Appraisal Rights 159
Dissenters’Right to Appraisal 159
Stock Market Exception to Appraisal Rights 159
Statutory Merger 160
Surviving Shareholder Approval Not Required 160
Short Form Merger 160
Tax Aspects of Corporate Acquisitions 161
Triangular Mergers 161
Reverse Triangular Merger 162
Share Exchange 163
Public Corporation Going Private 163
Dissolution 163
Voluntary Dissolution 164
Dissolution by Board of Directors and Shareholders（Section 14.02，RMBCA） 164
Payment of Known and Unknown Claims in Dissolution 164
Summary 166
Chapter12 WHAT ARE INSIDER AND TENDER OFFERS？ 170
Introduction 171
Securities Act of 1933 171
Securities Exchange Act of 1934 172
Who Is an Insider？ 172
Short-Swing Profits Section 16（b）Securities Exchange Act of 1934 172
Securities Exchange Act of 1934，Rule 10b-5 173
Securities Exchange Act of 1934（Antifraud Provision），Section 10 173
Discussion：Section 16（b）and Rule 10b-5 Securities Exchange Act of 1934 173
Antifraud Provision，Section 10（b）and Rule 10b-5 Securities Exchange Act of 1934 174
Causation and Reliance：Rule 10b-5 174
Case Law Under Rule 10b-5 Securities Exchange Act of 1934 175
Elements Needed for a Rule 10b-5 Private Action Securities Exchange Act of 1934 176
Securities Exchange Act of 1934，Section 20A 176
Civil Penalties for Insider Trading 176
Tender Offers 177
Terminology with Tender Offers 177
Toehold Acquisitions，Tender Offers，and the Williams Act，Sections 13（d），14（d），and 14（e），Securities Exchange Act of 1934 178
Summary 179
Chapter13 PUBLIC DISTRIBUTION OF SECURITIES 185
Introduction 186
Brief Description of the Securities Act of 1933 186
Registration 187
The Registration Process 187
Exemptions to Registration 188
How to Take a Small Business Public 188
Types of Underwriting 189
What Is a Security？ 190
What Is a Sale？（Reference to Security） 190
What Is an Offer to Sell？ 190
Section 5（a），Securities Act of 1933 190
Limited Offering Exemptions—Private Offers 191
Rule 504 Securities Act of 1933 191
Rule 505 Securities Act of 1933 191
Rule 506 Securities Act of 1933 192
Mechanics of Registration 192
After Registration 193
Duties and Prohibitions When in Registration 193
Liability Under the Securities Act 194
Blue Sky Laws 194
Antifraud Provisions 195
Misleading Proxy Statements 196
Fraudulent Tender Offers 196
Criminal Sanctions 196
Summary 196
Appendix A FORM OF CERTIFICATE OF INCORPORATION FOR THE STATE OF DELAWARE 200
Appendix B FORM OF MINUTES OF ORGANIZATION MEETING 201
Appendix C FORM OF BYLAWS 204
Appendix D FORM FOR A CLOSE CORPORATION AGREEMENT 211
Appendix E FORM FOR CERTIFICATE OF AGREED VALUE 216
Appendix F FORM FOR A PROXY 217
Glossary 219
Index 229