CORPORATIONS SHORT OUTLINE/CHECKLIST

CHECKLIST

I. Corporate Formation
a. PRE-INCORPORATION CONTRACTS
i. Promoters
ii. Subscribers
b. FORMATION*
i. De jure Corporation
ii. De Facto Corporation
iii. Corporation by Estoppel
c. PIERCING THE CORPORATE VEIL*

II. Issuance of Stock

a. CONSIDERATION
b. PREEMPTIVE RIGHTS*

III. Directors and Officers*

a. BOARD OF DIRECTORS
i. Statutory Requirements
ii. Effective Board Actions
iii. Duties/Bases of Liability
1. Manage
2. Care (BJR)
3. Loyalty (Interested, Self-Dealing, Opportunity, Ratification)
b. OFFICERS
c. INDEMNIFICATION

IV. Shareholders*
a. RIGHTS
i. Derivative Actions*
ii. Voting (Meetings, Proxies, Quorum)
iii. Dividends (Preference, Payable Funds, Liability)
iv. Inspection
v. Controlling Shareholders
vi. P.C.s
b. LIABILITIY

V. Fundamental Corporate Changes

a. MERGERS
b. SALE OF ASSETS
c. AMENDMENT OF ARTICLES
d. DISSOLUTION/LIQUIDATION

VI. Federal Securities Law

a. 10b-5
b. 16b
c. SARBANES-OXLEY

*=where most bar Qs come from

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I. Corporate Formation
a. PRE-INCORPORATION CONTRACTS
i. Promoter - Promoters act on behalf of a corporation that is not yet formed.
1. Corporation’s Liability - Corporation is not liable on a promoter's pre-incorporation Ks
until it adopts the K by:
a. (1) express board resolution, OR
b. (2) implied ratification through knowledge and acceptance of benefits
2. Promoter Liability – promoters remain liable on pre-incorporation contracts until there
is a novation; i.e. an agreement between the promoter, the corporation, AND the other
contracting party that the corporation will replace the promoter under the contract.
a. Promoters are also fiduciaries to each other and the corporation, so they cannot
make secret profits on their dealings with the corporation.
ii. Subscribers – a subscriber is a person who makes a written offer to buy stock from a
corporation that is not yet formed. Such offers are irrevocable for 6 months.

b. FORMATION
i. De jure Corporation
1. A de jure corporation (a “lawful corporation”) is one which satisfies all of the statutory
requirements by filing the articles of incorporation with the secretary of state. The
articles must include the following:
a. (1) name/address of the corporation – must contain indicia of corporate status:
“inc.” or “corporation” or “incorporated” or "limited"
b. (2) the incorporators names/addresses – can be an individual or business entity
c. (3) director’s names/addresses
d. (4) name of agent for services of process
e. (5) purpose - generally must have stmt of purpose– some states presume a
general purpose if no specific purpose (“for any lawful purpose” is okay)
i. ULTRA VIRES acts – activities beyond scope of stated business
purposes. At common law, ultra vires acts are void and unenforceable.
Modernly, ultra vires acts are generally enforceable as to third parties,
but can be challenged in three ways:
1. (1) Shareholders can seek injunction to stop U/V act
2. (2) Corp can sue responsible managers for U/V losses
3. (3) state may bring an action to dissolve a corporation
f. (6) authorized shares – the maximum # of shares the corporation is authorized
to issue, # of shares per class, and voting rights/preference per class
g. Statement of duration not required; presume perpetual existence of corp
2. LEGAL SIGNIFICANCE OF CORPORATION
a. A corp is a separate legal entity (can sue, hold property, be in a partnership)
b. Governed by law in state in which corp is formed
c. Subject to double-taxation – once on profits, another time on shareholder
distributions.
i. Unless “S-Corporation” which has no more than 100 shareholders, all of
which are human and U.S. citizens, there is only one class of stock, and
the stock is not publically traded.
d. Shareholders and directors and officers are NOT personally liable for obligations
of corporation – they have limited liability – only liable up to investment.
3. BYLAWS – papers re: internal governance. Not required. The board has the power to
adopt and amend the by-laws, unless the Articles give the power to the Shareholders.

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ii. De Facto Corporation

1. A De Facto Corporation will arise, which treats a business like a corporation, if the
organizers failed to properly form a de jure corporation, as long as:
a. (1) There's a relevant incorporation statute (always met)
b. (2) the organizers made a good faith, colorable attempt to comply with
corporate formalities, AND
c. (3) had no knowledge of the lack of corporate status, but the business
conducting itself like a corp.
2. Has been abolished in many states.

iii. Corporation by Estoppel

1. One who treats a business like a corporation may be estopped from denying that the
entity is a corporation. The “corporation” likewise cannot deny that it is a corporation if
it holds itself out as such. Generally only applies in contract cases.
2. Has been abolished in many states.

iv. Piercing the Corporate Veil

1. Shareholders/directors all have limited liability under a properly formed corporation.
However, in some instances, a creditor may “pierce the corporate” veil and hold the
shareholders/directors personally liable for the obligations of the corporation under
three theories:
a. (1) Alter Ego – shareholders treating corporate assets as their own or failure to
observe sufficient corporate formalities which would make it unfair for the
shareholders to have limited liability.
b. (2) Undercapitalization – failure to maintain sufficient funds to cover
foreseeable liabilities
c. (3) Fraud – corporate veil may be pierced where necessary to prevent fraud or
prevent an individual from using the entity to avoid personal obligations – IE: to
hide assets from creditors so assets are beyond reach

II. Issuance of Stock (corp sells its own stock)

a. CONSIDERATION
i. Form
1. A corporation must receive consideration for stock – which can be in the form of (i)
money, (ii) tangible or intangible property, or (iii) services already performed. Some
jurisdictions allow for (iv) promissory notes, or (v) future services.
a. Basically, anything the Board considers to be at least worth par value.
ii. Amount
1. Par Value means the minimum issuance price. A corporation must receive at least par
value for stock.
a. Directors are liable if knowingly sold stock at less than par value.
b. Buyers are also liable for buying stock at less than par value (no defenses)
2. No Par means no minimum issuance price – so price may be set by the board.
3. Treasury Stock means stock the company reacquired after issuing. It is considered
authorized but unissued – the corp can re-sell it as no par stock.
4. Watered Stock means stock sold for less than par value – the difference btwn the par
value & the lower amount sold is the “water."
a. Directors liable if knowingly issued; purchaser liable; third party liable w/ notice

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b. SUBSCRIPTIONS - written offers to buy stock from the corporation

i. Pre-incorporation subscriptions are irrevocable for 6 months
ii. Post-incorporation subscriptions are revocable until the board accepts the offer
c. PREEMPTIVE RIGHTS (tested a lot)
i. Right by an existing shareholder to maintain same percentage of ownership by buying stock
whenever there is a new issuance of stock for money.
1. States are split as to whether "new issuance" includes issuance of treasury stock
ii. In most states, there are no preemptive rights unless expressly granted by Articles.

III. Directors and Officers (hugely tested)

a. BOARD of DIRECTORS
i. Statutory Requirements
1. Director must be an adult natural person (not a business org; not so in other countries)
2. Board must have at least one member
3. Directors are initially named in articles then elected by shareholders at annual meetings
4. Shareholders can remove directors with or without cause at any time (w/ majority vote)
5. Board vacancy before end of term may be filled by other directors or shareholders, but
if vacancy created by shareholders, generally the shareholders fill the vacancy

ii. Effective Board Action

1. A meeting is required unless all directors consent in writing to act without a meeting
2. Quorum for Meetings – at all board meetings, there must be a quorum, which is where
you need a majority of all directors to do business (unless bylaws requires something
different) and then need majority vote of those present to take action/pass resolution
a. If people leave, quorum is broken and board can no longer act
3. No notice required for regular meetings, but is required for special meetings
a. Special mtg notice must include time and place of mtg, but not the purpose
4. Voting agreements/proxies are NOT allowed, but conference calls are valid
5. Each director is presumed to have concurred in Board action unless dissent or
abstention is in writing.

iii. Director Duties/Bases of Director Liability

1. Duty to MANAGE
a. Directors have a duty to manage the corporation – the day-to-day activities
b. They may delegate management functions to a committee of one or more
directors, but committee cannot fill vacancies or declare dividends – those
require full Board approval

2. Duty of CARE (always state this duty, it's the bulk of the points; BOP on Π)
a. Directors are fiduciaries to the corporation and owe a duty of care to the corp,
which requires the Board to act reasonably in good faith with due care of an
ordinarily prudent person, and in the best interest of the corp.
b. Nonfeasance – when the director fails to act and does nothing when it should
i. Director only liable if breach caused a loss to the corporation
c. Misfeasance – when the Board does something that hurts the corporation
i. BUSINESS JUDGMENT RULE – is applicable under the duty of care,
where a court will not second-guess a business decision if (1) it was
well informed, (2) was made in good faith, (3) with no conflicts of
interest, and (4) had a rational basis.

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d. The articles can limit liability under the duty of care.

3. Duty of LOYALTY(always state this duty, it's the bulk of the points; BOP on Δ)
a. Directors owes a fiduciary duty of loyalty to the corporation. Director must act
in good faith and w/ rsbl belief that what she does is in the corp's best interest.
b. Director may not to receive an unfair benefit or compete to the detriment of
the corporation or the shareholders, UNLESS (1) there is a material disclosure,
and (2) independent ratification.
i. Conflicting Interest Transactions (Self-Dealing)
1. Interested director transaction – director receives an unfair
benefit to herself, relative, or another of her businesses – in a
transaction with her own corporation.
a. This is OKAY if either (1) the dealing was fair to the
corporation, or (2) in many states, there is approval of
the action after material disclosure and vote by
disinterested directors or shares
i. Some states also require showing of fairness
b. It matters not that the interested director is present at
the meeting.
2. Remedy - Corporation can recover damages from the interested
director equal to that of the director’s profit
3. Competing ventures - Director cannot compete w/ her corp
ii. Corporate Opportunity Doctrine
1. This is where the director receives an unfair benefit by usurping
for herself an opportunity which is in the corp's line of business,
corp has an interest or expectancy in, or found using company
assets. Doesn’t apply to unrelated businesses as there is no
conflict there.
a. OKAY if director discloses all material facts to the
corporation and the corporation rejects the
opportunity.
2. Remedy - Shareholders can seek damages, constructive trust for
the profits, or getting the opportunity at cost.
iii. Ratification
1. Directors may defend against a claim by obtaining independent
ratification through:
a. (1) majority vote of independent directors,
b. (2) majority vote of committee of at least 2
independent directors, OR
c. (3) majority vote of shares held by independent
shareholders.
c. Articles CANNOT limit liability under the duty of loyalty.

4. Ultra vires acts - Responsible officers/directors are personally liable for ultra vires losses
5. Improper distributions
6. Improper loans - Liable for loans not rsbly expected to benefit the corporation
7. Which directors can be held liable for above?
a. Directors are presumed to concur w/ board action unless dissent/abstention is
noted in writing in the corporate records

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b. Exceptions - Not liable if absent and can rely in good faith on info presented by
professional rsbly believed competent
8. Articles can eliminate director liability to the corporation for damages, but not for
intentional misconduct, usurping corporate opportunities, unlawful distributions, or
improper personal benefit. Cts are split on whether this applies to officers as well.

b. OFFICERS
i. Officers owe the same duties of CARE and LOYALTY as the directors.
ii. Officers are agents of the corporation and can bind the corporation through their authorized
activities. (watch for crossover agency Q)
iii. Corporation must have a president, secretary, and treasurer (they can be in the same person).
iv. Directors select & remove/fire the officers (corp may be liable if fired officer had employment K)

c. INDEMNIFICATION OF DIRECTORS & OFFICERS

i. The corporation may NEVER indemnify a director who is held liable to their own corporation or
held to have received an improper personal benefit.
ii. The corporation MUST ALWAYS indemnify if a director or officer prevails in defending a lawsuit
against the director or officer
iii. The corporation MAY indemnify if a director or officer unsuccessfully defends a suit if the
director acted in good faith and believed actions to be in the best interest of the corporation.
1. Determined by majority vote of disinterested directors, disinterested shares, or
independent legal counsel
iv. Additionally, Ct may order indemnification if justified by circs; limited to costs & attys' fees

IV. Shareholders
a. Shareholders are the owners of a corporation. Absent a provision in the Articles or a shareholder
agreement, they have no power to manage the corporation. The management power is in the directors.
i. Shareholders can eliminate the board and manage the corporation directly in a closely held
corporation, which requires a small number of shareholders and no market for company stock
1. If shareholder is a corp, may be able to pierce veil to go after parent corp's assets
b. Shareholder Rights
i. Shareholder Derivative Actions
1. Shareholder derivative suits – brought by shareholders to enforce the corporation’s
cause of action. Not a personal action. Requirements:
a. (1) Contemporaneous stock owner – must own at least one share of stock
BOTH at the time the claim arose AND throughout the litigation.
b. (2) Demand to bring action must be made to the directors and rejected by
directors, or if at least 90 days pass after demand was made. Demand
requirement may not be required if it would be futile
c. (3) Shareholder can adequately represent interests of the corporation
2. Recovery goes to the corporation, and individual is reimbursed for litigation costs (no
reimbursement if NOT successful).
ii. Voting Rights
1. Only shareholders that are the owners on the record date may vote. The record date is
the vote eligibility cut-off date set by the Board on any day up to 70 days before the mtg
a. (Treasury stock does not make the corp itself a voting shareholder)
2. Meetings
a. Must be an annual meeting at least every 15 months– Can act w/o mtg if there
is unanimous written consent by all holders of all voting shares.

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b. There may also be special meetings, which are called by the board, the
president, or 10% shareholders.
i. Shareholders may only vote on proposals or fundamental corporate
changes, and the notice must contain the special purpose.
c. Notice
i. Must give written notice to every shareholder 10-60 days before mtg
1. If no notice, action taken at mtg is void unless waiver occurs
ii. Must state time and place of mtg. If special mtg, must state purpose
3. Proxies
a. A shareholder may use a proxy to vote for the shareholder if: (i) gives notice in
writing, (ii) signed by record shareholder, (iii) directed to the corporate
secretary, (iv) authorizing another to vote
b. Proxy valid for 11 months unless stated otherwise (can be perpetual if stated)
c. Any authorization is revocable, unless it conspicuously made irrevocable and it
is coupled with an interest. Can revoke in writing, by shareholder showing up to
vote himself, or by later appointment of another proxy.
4. Effective Shareholder Action
a. QUORUM NECESSARY –determined by the number of shares represented, NOT
the number of shareholders. QUORUM requires a majority of outstanding
voting shares when the meeting begins. Quorum is not lost if people leave the
meeting (diff from director’s meetings).
i. Action is then deemed approved if votes cast in favor of action exceed
votes cast against the action.
5. Shareholder Agreements to Control Voting
a. Voting (“Pooling”) Agreement
i. This is a signed, written agreement to vote shares as required in
agreement. They are binding and enforceable, with no time limit.
b. Voting Trusts
i. This is a formal written agreement, filed w/ corp, delegating voting
power to a trustee. Expires in 10 years. (can't breach b/c power w/ trustee)
c. Stock Transfer Restriction Agreement
i. Shareholders may freely sell or give stock away. Any restriction on the
transfer of shares must be a reasonable restriction – cannot be an
absolute restriction on transferability
6. Cumulative Voting for Directors
a. Multiply the number of shares times the number of directors to be elected.
b. Power to vote cumulatively MUST be granted in the Articles or will not exist
iii. Distributions - 3 types, done at board's discretion
1. Dividends
2. Repurchase - voluntary sale of stock to corp
3. Redemption - forced sale of stock to corp at price set in the articles
iv. Dividends
1. A shareholder has NO RIGHT to dividends. The dividends are declared by the Board.
a. Preference of Stock
i. Preferred shares have a right to receive dividends before common
shares (doesn't get common stock dividend amt unless participating)
ii. If preferred stock is “participating” – it receives its dividends once
before common stock, and gets paid a second time on the dividends
paid to the common stock.

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iii. If preferred stock is cumulative, it is paid out on all prior years in which
the dividends were not paid (the years the dividends “accumulated”)
prior to the common stock.
b. Payable Funds
i. Traditionally, dividends are payable out of earned surplus (all earnings
MINUS all losses), never out of stated capital (par value of issued
stock); capital surplus (pmts in excess of par + amts allocated in a no-
par issuance) can be used if shareholders informed
ii. Modernly, dividends may not be paid out if the corp is insolvent or it
would make the corp insolvent, which is shown if (i) the corp cannot pay
its debts, or (ii) the corp’s total assets are less than its total liabilities.
c. Liability
i. The Board is personally liable for unlawful distributions but have a good
faith defense based on financial officer’s representations.
ii. Shareholder are also liable if they knew the distribution was improper
when they received it.
v. Inspection Rights
1. A shareholder has a right to inspect records, books, shareholders lists, as long as it is for
a proper purpose (related to role as shareholder)– upon notice and a reasonable time.
vi. Controlling Shareholders
1. Controlling shareholders must refrain from obtaining a special advantage or cause
corporation to take action prejudicing minority shareholders.
2. Controlling shareholders are treated as “insiders” under Securities Exchange Act.
vii. Professional Corporations
1. Licensed professionals may incorporate as a P.C.
2. Requires the Articles to designate as a P.C. or “professional corporation” – and
shareholders must be licensed professionals and practice only one designated
profession.
3. Liability – professionals only liable for own malpractice but not for each other’s or the
corporation itself

c. Shareholder Liabilities
i. Shareholders are generally NOT liable for corporate obligations and have no fiduciary duties to
the corporation, unless one of the following exceptions applies:
1. (1) piercing the corporate veil (only abusing shareholder is held liable)
a. Very difficult to do but Cts are more willing to PCV for tort vxs than in K cases
b. PCV Requirements
i. (1) Alter Ego – shareholders treating corporate assets as their own or
failure to observe sufficient corporate formalities which would make it
unfair for the shareholders to have limited liability.
ii. (2) Undercapitalization – failure to maintain sufficient funds to cover
foreseeable liabilities
iii. (3) Fraud – corporate veil may be pierced where necessary to prevent
fraud or prevent an individual from using the entity to avoid personal
obligations – IE: to hide assets from creditors so assets are beyond
reach
2. (2) controlling shareholders owe fiduciary duties to minority shareholders, so can be
held personally liable for breaching those duties

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V. Fundamental Corporate Changes

a. Fundamental corporate changes are extraordinary, so more action is required. Typically, we need (1)
Board adopts a resolution, (2) written notice is given to shareholders, (3) shareholders approve
changes by majority of ALL shares entitled to vote, and (4) changes in the form are filed with the
secretary of state. Majority of directors/shareholders authorizing the change must be disinterested.

b. RIGHT OF APPRAISAL
i. A dissenting shareholder who does not vote in favor of a fundamental change has the right to
force the corporation to buy her shares at fair value, by doing the following:
a. (1) file a written objection before the shareholder vote
b. (2) vote against merger or abstain from voting
c. (3) file written claim demanding to be bought out after the vote
ii. Right of appraisal exists if corp does any of the following: (1) merger or consolidation; (2)
transfer of substantially all assets not in the ordinary course of business, or (3) transfer of shares
in a share exchange
iii. Exception - No right of appraisal if stock listed on national exchange or has 2,000+ shareholders

c. AMENDMENT OF ARTICLES
i. Corporation can amend articles by following the above procedure. No appraisal rights.
ii. Board of directors may amend or repeal bylaws unless articles exclusively reserve power to
shareholders

d. MERGERS
i. A merger involves the blending of one or more corporations into another corporation, the latter
surviving and the merging corps cease to exist – which is done by following the procedure
above. Directors and shareholders of BOTH corporations must act and approve.
1. A short-form merger does not require shareholder approval – which is where 90% or
more owned subsidiary merges into a parent corporation.
ii. Right of appraisal applies as remedy for dissenting shareholders
iii. Effect of Merger (Liability): The surviving corporation takes on liability for debts and obligations
– successor liability.

e. SALE OF ASSETS
i. If sale, lease or exchange of substantially all of the corporate assets (MORE THAN 75% of
assets) is outside the ordinary course of the business, then majority of directors AND majority
of all shares entitled to vote must approve. There is a right of appraisal for the seller’s corp.
1. Only shareholders for selling corp get a vote, not the buying corp
ii. De Facto Merger
1. A sale of assets may be considered a de facto merger, and may trigger possible
rescission or appraisal rights
2. Purchasing corporation may be liable for debts and liabilities

f. DISSOLUTION (process of winding up)/LIQUIDATION

i. Voluntary
1. Majority of directors AND shareholder votes cast in favor must exceed votes cast against
at a mtg where quorum is present. Notice of intent to dissolve is filed w/ the SOS. Corp
stays in existence until it is wound up. Creditors must be notified so they can file claims.
2. If liquidation, pay outside creditors first

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ii. Involuntary
1. A shareholder can petition for involuntary dissolution because of:
a. (1) director abuse, waste of assets, or misconduct (director misbehavior)
b. (2) director deadlock that harms the corporation
c. (3) shareholders failed at two consecutive annual meetings to fill vacant board
position.
iii. Distribution of assets upon liquidation
1. Each unsecured creditor is entitled to a pro rata share of remaining assets (% based on
what that creditor's % is of the total debt…90k/120k = 75% of remaining assets)
2. Generally, inside unsecured creditors(shareholders) are not subordinate to other,
outside unsecured creditors
a. Exception - Equitable Subordination - a court may subordinate inside creditor's
claims if any kind of wrongdoing is attributable to them

VI. Federal Securities Law

Securities are investments
a. TYPES OF SECURITIES
i. Debt securities -
1. Investor lends capital to the corp to be repaid w/ interest as specified in the agmt.
2. Debt holder is a creditor of the corp, not an owner , so has contractual right to be repaid
a. Secured=bond; Unsecured=debenture
ii. Equity securities
1. Investor buys stock from the corp, which generates capital for the business
2. Equity holder is an owner, not a creditor

b. RULE 10b-5
i. Elements: Rule 10b-5 is designed to prevent fraudulent trading of stock, and a person will be
found guilty of violating 10b-5 if the following elements are met:
1. (1) used the channels of interstate commerce (telephone, mail, etc.)
2. (2) fraudulent conduct, which includes
a. (i) scienter – intent to deceive,
i. Insider trading is the most common form of fraudulent conduct
b. (ii) the deceit was material – where reasonable investor would consider it
important in making an investment decision, and
c. (iii) misrepresentation or failure to disclose that breaches a fiduciary duty.
3. (3) must be in connection with a purchase or sale of stock
4. (4) reliance by another on the misrepresentation or failure to disclose
a. Presumed in public misrepresentation and nondisclosure cases
5. (5) damages

ii. Insider Trading

1. The following insiders have a duty to abstain from trading or disclose their info:
a. Directors, officers, controlling shareholders, or employees with access to
confidential information
2. An insider breaches 10b-5 if by trading he breaches a duty of trust and confidence owed
to: (1) the issuer, (2) the shareholders of the issuer, or (iii) in the case of
misappropriators, another person who is the source of the material nonpublic info.
3. A person must be an insider, who directly or indirectly bought or sold stock via inside
information, and which was based on nonpublic information

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iii. Tipper Liability

1. If an insider gives a tip of inside information to someone else who trades on the basis of
the inside information, the tipper can be liable under 10b-5 if the following are met:
a. (1) tipper is an insider
b. (2) tipper must have an improper purpose
c. (3) tipper must receive some personal gain (monetary, reputational, as gift)

iv. Tippee Liability

1. A tippee can be found liable under 10b-5 if the following are met:
a. (1) the tipper breached
b. (2) the tippee knew that the tipper breached by disclosing the information, and
c. (3) tippee bought or sold stock based on the inside information

v. Misappropriation Theory
1. This is an action brought by the government against a trader who:
a. (1) misappropriated information from any source
b. (2) in breach of a duty of trust and confidence owed to the source of the
information

vi. Misrepresentation of Material Info - Material if rsbl investor would consider impt

vii. Liability Upon Violation -

1. 1) civil suit for damages up to 3x the gain made
2. 2) criminal penalties of up to $1 million and jail time of up to 10 years

c. RULE 16b (strict liability-quick turnaround rule)

i. Rule 16b allows corp to recover "profits" gained by insiders from buying/selling the company's
stock.
1. Imposes strict liability for covered transaction
2. (creates claim for corporation, so may come up in a derivative suit)
ii. Elements:
1. (1) involves a large corporation which is either
a. (i) traded on the national exchange, or
b. (ii) has 500+ shareholders and at least $10 million in assets,
2. (2) the defendant is either an officer, director, or at least 10% shareholder, AND
a. (10% at time of both the purchase AND the sale),
b. Not applicable to officers and directors who bought or sold before becoming an
officer/director, but applicable for up to 6 months after ceasing to be one
c. When this issue is tested, it tends to be tested on this element
3. (3) involves the purchase and sale of stock within a 6-month period
iii. Result: Disgorgement of any profit. The highest sales are matched with the lowest purchases to
maximize recovery.
iv. NO DEFENSES – strict liability.
v. Types of Δs
1. Directors (either when bought or sold), OR
2. Officer (either when bought or sold) OR
3. Shareholder who owns more than 10% (both when bought and sold)

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d. SARBANES-OXLEY
i. Only a public accounting firm registered with the Oversight Board may prepare or issue audit
reports with respect to a registered company.
ii. Corporate Responsibility:
1. CEO and CFO must certify that based on the Officer’s knowledge, reports filed with
Securities and Exchange Commission (SEC) do not contain falsehoods
2. If false reports have to be corrected and restated, the corporation (directly or
derivatively) may recover Officer’s benefits made from trading the company’s securities
within 12 months after the false reports were filed, and may recover incentive-based
compensation received during that period
iii. Corporations (directly or derivatively) may also recover any benefits made by officers from
trading corporation’s stock during “black out” periods when employees are prohibited from
trading in their retirement plan’s securities

VII. Most likely issues on bar

a. Fiduciary duty of loyalty
b. Fiduciary duty of care
c. Piercing the corporate veil
d. Derivative lawsuits
e. Formation of the corporation

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