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Business Organizations
last updated 16 Sep 02
 
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CLASS NOTES

 
 
Outline
  • Insider opportunism 
    • creditors: 
      • insiders misrepresent risks 
      • insiders take excessive distributions
    • shareholders: 
      • insiders issue watered stock 
      • insiders change share rights in articles
  • "Equity cushion" - capital structure 
    • history 
      • par value 
      • legal capital 
      • "trust fund" theory 
      •  minimum capital requirements
    • issuance of securities 
      • legal opinion 
      • (1) "validly issued" 
      • (2) "fully paid and non-assessable" 
      • type of consideration 
      • director liability
    • distributions to shareholders 
      • (1) equity insolvency rules 
      • (2) legal capital rules 
        • assets > liabilities + dissolution preference 
        • when measure?  debt payments to SHs
Daily Thoughts

 
Problems

 The articles of Happy Partners, Inc. (incorporated in an MBCA jurisdiction) specify that the company's common stock has a par value of $5.00 per share.  On January 1, the board approves the issuance of common stock for $10 per share.  The company issues shares as follows:  Albert pays $3,000 for 1000 shares; Barney gives his promissory note for $10,000 for 1000 shares.  After two years the corporation is insolvent.

Party A (creditors) Argue the directors and the shareholders are liable.  To whom will liability run?

Party B (SHs / Ds) Argue that the directors and shareholders are not liable.  But if they are, to whom should liability run?
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