Complete Home & Office Legal Guide/Complete Home and Office Legal Guide (Chestnut) (1993).ISO/stat/mbiz/busi2t.asc

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/* The Business Corporations Act continues. This is part 2 out of
8. */

(c) Shares issued pursuant to subscriptions entered into before
incorporation are fully paid and nonassessable when the
corporation receives the consideration specified in the
subscription agreement.

(d) If a subscriber defaults in payment of money or property
under a subscription agreement entered into before incorporation,
the corporation may collect the amount owed as any other debt.
Alternatively, unless the subscription agreement provides
otherwise, the corporation may rescind the agreement and may sell
the shares if the debt remains unpaid more than 20 days after the
corporation sends written demand for payment to the subscriber.
(e) A subscription agreement entered into after incorporation is
a contract between the subscriber and the corporation subject to
section 6.21.

Official Comment

Agreements for the purchase of shares to be issued by a
corporation are typically referred to as "subscriptions" or
"subscription agreements." Section 6.20 deals exclusively with
preincorporation subscriptions, that is, subscriptions entered
into before the corporation was formed. Preincorporation
subscriptions have often been considered to be revocable offers
rather than binding contracts. Since the corporation is not in
existence, it cannot be a party to the agreement and the
consideration established for the shares is not determined by the
board of directors. While preincorporation subscriptions entered
into simultaneously by several subscribers may be considered a
binding contract between or among the subscribers, not all
factual situations lend themselves to contractual analysis.
Because of the uncertainty of the legal enforceability of these
transactions, section 6.20 provides a simple set of legal rules
applicable to the enforcement of preincorporation subscriptions
by the corporation after its formation. It does not address the
extent to which preincorporation subscriptions may constitute a
contract between or among subscribers, and other subscribers may
enforce whatever contract rights they have without regard to
section 6.20.

 Section 6.20(a) provides that preincorporation
subscriptions are irrevocable for six months unless the
subscription agreement provides that they are revocable or that
they are irrevocable for some other period. Nevertheless, all the
subscribers to shares may agree at any time that a subscriber may
withdraw in part from his commitment to subscribe for shares,
that a subscriber may revoke his subscription entirely, or that
the period of irrevocability may continue for an additional
stated period. If the corporation accepts the subscription during
the period of irrevocability, the subscription becomes a contract
binding on both the subscribers and the corporation. The terms of

this contract are set forth in sections 6.20(b) and (d). . .

 Postincorporation subscriptions are contracts between the
corporation and the investor by which the corporation agrees to
issue shares for a stated consideration and the investor agrees
to purchase the shares for that consideration. Postincorporation
subscriptions are simple contracts subject to the power of the
board of directors and they may contain any mutually acceptable
provisions subject to section 6.21.  Section 6-20(e) states, for
completeness, that postincorporation subscriptions are contracts
between the corporation and the subscriber subject to section
6.21.

6.21 Issuance of Shares

(a) The powers granted in this section to the board of directors
may be reserved to the shareholders by the articles of
incorporation.

(b) The board of directors may authorize shares to be issued for
consideration consisting of any tangible or intangible property
or benefit to the corporation, including cash, promissory notes,
services performed, contracts for services to be performed, or
other securities of the corporation.

/* Many previous Business Corporations Acts do not permit shares
to be executed for promises for later services. */

(c) Before the corporation issues shares, the board of directors
must determine that the consideration received or to be received
for shares to be issued is adequate. That determination by the
board of directors is conclusive insofar as the adequacy of
consideration for the issuance of shares relates to whether the
shares are validly issued, fully paid, and nonassessable.

(d) When the corporation receives the consideration for which the
board of directors authorized the issuance of shares, the shares
issued therefor are fully paid and nonassessable.

(e) The corporation may place in escrow shares issued for a
contract for future services or benefits or a promissory note, or
make other arrangements to restrict the transfer of the shares,
and may credit distributions in respect of the shares against
their purchase price, until the services are performed, the note
is paid, or the benefits received. If the services are not
performed, the note is not paid, or the benefits are not
received, the shares escrowed or restricted and the distributions
credited may be cancelled in whole or part.

Official Comment

 The financial provisions of the Model Act reflect a
modernization of the concepts underlying the capital structure
and limitations on distributions of corporations.  This process
of modernization began with amendments in 1980 to the 1969 Model
Act that eliminated the concepts of "par value" and "stated
capital," and further modernization occurred in connection with
the development of the revised Act in 1984.  Practitioners and
legal scholars have long recognized that the statutory structure
embodying "par value" and "legal capital" concepts is not only
complex and confusing but also fails to serve the original
purpose of protecting creditors and senior security holders from
payments to junior security holders. Indeed, to the extent
security holders are led to believe that it provides this
protection, these provisions may be affirmatively misleading.
The Model Act has therefore eliminated these concepts entirely
and substituted a simpler and more flexible structure that
provides more realistic protection to these interests.  Major
aspects of this new structure are:

(1) the provisions relating to the issuance of shares set forth
in this and the following sections:

(2) the provisions limiting distributions by corporations set
forth in section 6.40 and discussed in the Official Comment to
that section; and

(3) the elimination of the concept of treasury shares described
in the Official Comment to section 6.31. Section 6.21
incorporates not only the elimination of the concepts of par
value and stated capital from the Model Act in 1980 but also
eliminates the earlier rule declaring certain kinds of property
ineligible as consideration for shares. .

 Since shares need not have a par value, under section
6.21 there is no minimum  price at which specific shares must be
issued and therefore there can be no "watered stock" liability
for issuing shares below an arbitrarily fixed price.  The price
at which shares are issued is primarily a matter of concern to
other shareholders whose interests may be diluted if shares are
issued at unreasonably low prices or for overvalued property.
This problem of equality of treatment essentially involves honest
and fair judgments by directors and cannot be effectively
addressed by an arbitrary doctrine establishing a minimum price
for shares such as "par value" provided under older statutes.

 Section 6.21(b) specifically validates contracts for
future services (including promoters' services), promissory
notes, or "any tangible or intangible property or benefit to the
corporation," as consideration for the present issue of shares.
The term "benefit" should be broadly construed to include, for
example, a reduction of a liability, a release of a claim, or
benefits obtained by a corporation by contribution of its shares
to a charitable organization or as a prize in a promotion. In the
realities of commercial life there is sometimes a need for the
issuance of shares for contract rights or such intangible
property or benefits.  And, as a matter of business economics,
contracts for future services, promissory notes, and intangible
property or benefits often have value that is as real as the
value of tangible property or past services, the only types of
property that many older statutes permit as consideration for
shares. Thus, only business judgment should determine what kind
of property should be obtained for shares, and a determination by
the directors meeting the requirements of section 8.30 to accept
a specific kind of valuable property for shares should be
accepted and not circumscribed by artificial or arbitrary rules.

 The issuance of some shares for cash and other shares for
promissory notes, contracts for past or future services, or for
tangible or intangible property or benefits, like the issuance of
shares for an inadequate consideration, opens the possibility of
dilution of the interests of other shareholders. For example,
persons acquiring shares for cash may be unfairly treated if
optimistic values are placed on past or future services or
intangible benefits being provided by other persons.  The problem
is particularly acute if the persons providing services,
promissory notes, or property or benefits of debatable value are
themselves connected with the promoters of the corporation or
with its directors. Protection of shareholders against abuse of
the power granted to the board of directors to determine that
shares should be issued for intangible property or benefits is
provided in part by the requirement that the board must act in
accordance with the requirements of section 8.30, and, if
applicable, section 8.31, in determining that the consideration
received for shares is adequate, and in part by the requirement
of section 16.21 that the corporation must inform all
shareholders annually of all shares issued during the previous
year for promissory notes or promises of future services.

 Accounting principles are not specified in the Model Act,
and the board of directors is not required by the statute to
determine the "value" of noncash consideration received by the
corporation (as was the case in earlier versions of the Model
Act).  In many instances, property or benefit received by the
corporation will be of uncertain value; if the board of directors
determines that the issuance of shares for the property or
benefit is an appropriate transaction that protects the
shareholders from dilution, that is sufficient under section
6.21.  The board of directors does not have to make an explicit
"adequacy" determination by formal resolution; that determination
may be inferred from a determination to authorize the issuance
of shares for a specified consideration.

 Section 6.21 also does not require that the board of
directors determine the value of the consideration to be entered
on the books of the corporation, though the board of directors
may do so if it wishes.  Of course, a specific value must be
placed on the consideration received for the shares for
bookkeeping purposes, but bookkeeping details are not the
statutory responsibility of the board of directors. The statute
also does not require the board of directors to determine the
corresponding entry on the right-hand side of the balance sheet
under owner's equity to be designated as "stated capital" or be
allocated among "stated capital" and other surplus accounts. The
corporation, however, may determine that the shareholders' equity
accounts should be divided into these traditional categories if
it wishes.

 The second sentence of section 6.21(c) describes the
effect of the determination by the board of directors that
consideration is adequate for the issuance of shares.  That
determination, without more, is conclusive to the extent that
adequacy is relevant to the question whether the shares are
validly issued, fully paid, and nonassessable.  Section 6.21(c)
provides that shares are fully paid and nonassessable when the
corporation receives the consideration for which the board of
directors authorized their issuance. Whether shares are validly
issued may depend on compliance with corporate procedural
requirements, such as issuance within the amount authorized in
the articles of incorporation or holding a directors' meeting
upon proper notice and with a quorum present. The Model Act does
not address the remedies that may be available for issuances that
are subject to challenge. . .

 The revised Model Act does not address the question
whether validly issued shares may thereafter be cancelled on the
grounds of fraud or bad faith if the shares are in the hands of
the original shareholder or other persons who were aware of the
circumstances under which they were issued when they acquired the
shares. It also leaves to the Uniform Commercial Code other
questions relating to the rights of persons other than the person
acquiring the shares from the corporation. . .


 6.22 Liability of Shareholders

(a) A purchaser from a corporation of its own shares is not
liable to the corporation or its creditors with respect to the
shares except to pay the consideration for which the shares were
authorized to be issued (section 6.21) or specified in the
subscription agreement (section 6.20).

(b) Unless otherwise provided in the articles of incorporation, a
shareholder of a corporation is not personally liable for the
acts or debts of the corporation except that he may become
personally liable by reason of his own acts or conduct.

6.23 Share Dividends

(a) Unless the articles of incorporation provide otherwise,
shares may be issued pro rata and without consideration to the
corporation's shareholders or to the shareholders of one or more
classes or series.  An issuance of shares under this subsection
is a share dividend.

(b) Shares of one class or series may not be issued as a share
dividend in respect of shares of another class or series unless
(1) the articles of incorporation so authorize, (2) a majority of
the votes entitled to be cast by the class or series to be issued
approve the issue, or (3) there are no outstanding shares of the
class or series to be issued.

(c) If the board of directors does not fix the record date for
determining shareholders entitled to a share dividend, it is the
date the board of directors authorizes the share dividend.

Official Comment

A share dividend is solely a paper transaction: No assets are
received by the corporation for the shares and any "dividend"
paid in shares does not involve the distribution of property by
the corporation to its shareholders.  Section 6.23 therefore
recognizes that such a transaction involves the issuance of
shares "without consideration," and section 1.40(6) excludes it
from the definition of a Such transactions were treated in a
fictional way under the old "par value" and "stated capital"
statutes, which treated a share dividend as involving transfers
from a surplus account to stated capital and assumed that par
value shares could be issued without receiving any consideration
by reason of that transfer of surplus.

 The par value statutory treatment of share dividend
transactions distinguished a share "split" from a dividend. In a
share "split" the par value of the former shares was divided
among the new shares and there was no transfer of surplus into
the stated capital account as in the case of a share "dividend."
Since the Model Act has eliminated the concept of par value, the
distinction between a "split" and a "dividend" has not been
retained and both types of transactions are referred to simply as
"share dividends." A distinction between "share dividends" and
"share splits." however, continues to exist in other contexts-for
example, in connection with transactions by publicly held
corporations, see N.Y.S.E. Listed Company Manual 703.02(a), or
corporations that have optionally retained par value for their
shares. The change made in the Model Act is not intended to
affect the manner in which transactions by these corporations are
handled or described but simply reflects the elimination of
artificial legal distinctions based on the par value
statutes . . .

6.24 Share Options

A corporation may issue rights, options, or warrants for the
purchase of shares of the corporation. The board of directors
shall determine the terms upon which the rights, options, or
warrants are issued, their form and content, and the
consideration for which the shares are to be issued.

6.25 Form and Content of Certificates

(a) Shares may but need not be represented by certificates.
Unless this Act or another statute expressly provides otherwise,
the rights and obligations of shareholders are identical whether
or not their shares are represented by certificates.

(b) At a minimum each share certificate must state on its face:

(1) the name of the issuing corporation and that it is organized
under the law of this state;

(2) the name of the person to whom issued; and

(3) the number and class of shares and the designation of the
series, if any, the certificate represents.

(c) If the issuing corporation is authorized to issue different
classes of shares or different series within a class, the
designations, relative rights, preferences. and limitations
applicable to each class and the variations in rights,
preferences, and limitations determined for each series (and the
authority of the board of directors to determine variations for
future series) must be summarized on the front or back of each
certificate.  Alternatively, each certificate may state
conspicuously on its front or back that the corporation will
furnish the shareholder this information on request in writing
and without charge.

(d) Each share certificate (1) must be signed (either manually or
in facsimile) by two officers designated in the bylaws or by the
board of directors and (2) may bear the corporate seal or its
facsimile.

(e) If the person who signed (either manually or in facsimile) a
share certificate no longer holds office when the certificate is
issued, the certificate is nevertheless valid.

6.26 Shares Without Certificates

(a) Unless the articles of incorporation or bylaws provide
otherwise, the board of directors of a corporation may authorize
the issue of some or all of the shares of any or all of its
classes or series without certificates.  The authorization does
not affect shares already represented by certificates until they
are surrendered to the corporation.

/* Thus the shares can be represented by electronic or other book
transactions. */

(b) Within a reasonable time after the issue or transfer of
shares without certificates, the corporation shall send the
shareholder a written statement of the information required on
certificates by section 6.25(b) and (c), and, if applicable,
section 6.27.

6.27 Restriction on Transfer of Shares and Other Securities

(a) The articles of incorporation, bylaws, an agreement among
shareholders, or an agreement between shareholders and the
corporation may impose restrictions on the transfer or
registration of transfer of shares of the corporation.  A
restriction does not affect shares issued before the restriction
was adopted unless the holders of the shares are parties to the
restriction agreement or voted in favor of the restriction.

(b) A restriction on the transfer or registration of transfer of
shares is valid and enforceable against the holder or a
transferee of the holder if the restriction is authorized by this
section and its existence is noted conspicuously on the front or
back of the certificate or is contained in the information
statement required by section 6.26(b).  Unless so noted, a
restriction is not enforceable against a person without knowledge
of the restriction.

(c) A restriction on the transfer or registration of transfer of
shares is authorized:

(1) to maintain the corporation's status when it is dependent on
the number or identity of its shareholders;

(2) to preserve exemptions under federal or state securities law;

(3) for any other reasonable purpose.

(d) A restriction on the transfer or registration of transfer of
shares may:

(1) obligate the shareholder first to offer the corporation or
other persons (separately, consecutively, or simultaneously) an
opportunity to acquire the restricted shares;

(2) obligate the corporation or other persons (separately,
consecutively, or simultaneously) to acquire the restricted
shares;

(3) require the corporation, the holders of any class of its
shares, or another person to approve the transfer of the
restricted shares, if the requirement is not manifestly
unreasonable;

(4) prohibit the transfer of the restricted shares to designated
persons or classes of persons, if the prohibition is not
manifestly unreasonable.

(e) For purposes of this section, "shares" includes a security
convertible into or carrying a right to subscribe for or acquire
shares.

6.28 Expense of Issue

A corporation may pay the expenses of selling or underwriting its
shares, and of organizing or reorganizing the corporation, from
the consideration received for shares.

Subchapter C

Subsequent Acquisition of Shares by Shareholders and Corporation

6.30 Shareholders' Preemptive Rights

(a) The shareholders of a corporation do not have a preemptive
right to acquire the corporation's unissued shares except to the
extent the articles of incorporation so provide.

(b) A statement included in the articles of incorporation that
"the corporation elects to have preemptive rights" (or words of
similar import) means that the following principles apply except
to the extent the articles of incorporation expressly provide
otherwise:

(1) The shareholders of the corporation have a preemptive right,
granted on uniform terms and conditions prescribed by the board
of directors to provide a fair and reasonable opportunity to
exercise the right, to acquire proportional amounts of the
corporation's unissued shares upon the decision of the board of
directors to issue them.

/* Pre-emptive rights are those which allow shareholders to
purchase shares more shares of the corporation if they are
issued, so to maintain their equity/ */

(2) A shareholder may waive his preemptive right.  A waiver
evidenced by a writing is irrevocable even though it is not
supported by consideration.

(3) There is no preemptive right with respect to:

(i) shares issued as compensation to directors, officers, agents,
or employees of the corporation, its subsidiaries or affiliates;

(ii) shares issued to satisfy conversion or option rights created
to provide compensation to directors, officers, agents, or
employees of the corporation, its subsidiaries or affiliates;

(iii) shares authorized in articles of incorporation that are
issued within six months from the effective date of
incorporation;

(iv) shares sold otherwise than for money.

(4) Holders of shares of any class without general voting rights
but with preferential rights to distributions or assets have no
preemptive rights with respect to shares of any class.

(5) Holders of shares of any class with general voting rights but
without preferential rights to distributions or assets have no
preemptive rights with respect to shares of any class with
preferential rights to distributions or assets unless the shares
with preferential rights are convertible into or carry a right to
subscribe for or acquire shares without preferential rights.

(6) Shares subject to preemptive rights that are not acquired by
shareholders may be issued to any person for a period of one year
after being offered to shareholders at a consideration set by the
board of directors that is not lower than the consideration set
for the exercise of preemptive rights.  An offer at a lower
consideration or after the expiration of one year is subject to
the shareholders' preemptive rights.

(c) For purposes of this section, "shares" includes a security
convertible into or carrying a right to subscribe for or acquire
shares.

Subchapter D

Distributions

6.40 Distributions to Shareholders

(a) A board of directors may authorize and the corporation may
make distributions to its shareholders subject to restriction by
the articles of incorporation and the limitation in subsection
(c).

(b) If the board of directors does not fix the record date for
determining shareholders entitled to a distribution (other than
one involving a purchase, redemption, or other acquisition of the
corporation's shares), it is the date the board of directors
authorizes the distribution.

(c) No distribution may be made if, after giving it effect:

(1) the corporation would not be able to pay its debts as they
become due in the usual course of business; or

/* The equity definition of bankruptcy. */

(2) the corporation's total assets would be less than the sum of
its total liabilities plus (unless the articles of incorporation
permit otherwise) the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution,
to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those
receiving the distribution.

/* The legal definition of bankruptcy. The combined effect of
these sections is to prevent distributions when the effect is to
result in financial instability of the corporation. */

(d) The board of directors may base a determination that a
distribution is not prohibited under subsection (c) either on
financial statements prepared on the basis of accounting
practices and principles that are reasonable in the circumstances
or on a fair valuation or other method that is reasonable in the
circumstances.

(e) Except as provided in subsection (g), the effect of a
distribution under subsection (c) is measured:

(1) in the case of distribution by purchase, redemption, or other
acquisition of the corporation's shares, as of the earlier of (i)
the date money or other property is transferred or debt incurred
by the corporation or (ii) the date the shareholder ceases to be
a shareholder with respect to the acquired shares;

(2) in the case of any other distribution of indebtedness, as of
the date the indebtedness is distributed; and

(3) in all other cases, as of (i) the date the distribution is
authorized if the payment occurs within 120 days after the date
of authorization or (ii) the date the payment is made if it
occurs more than 120 days after the date of authorization.

(f) A corporation's indebtedness to a shareholder incurred by
reason of a distribution made in accordance with this section is
at parity with the corporation's indebtedness to its general,
unsecured creditors except to the extent subordinated by
agreement.

(g) Indebtedness of a corporation, including indebtedness issued
as a distribution, is not considered a liability for purposes of
determinations under subsection (c) if its terms provide that
payment of principal and interest are made only if and to the
extent that payment of a distribution to shareholders could then
be made under this section. If the indebtedness is issued as a
distribution, each payment of principal or interest is treated as
a distribution, the effect of which is measured on the date the
payment is actually made.

Official Comment

The reformulation of the statutory standards governing
distributions is another important change made by the 1980
revisions to the financial provisions of the Model Act. It has
long been recognized that the traditional "par value" and "stated
capital" statutes do not provide significant protection against
distributions of capital to shareholders.  While most of these
statutes contained elaborate provisions establishing "stated
capital," "capital surplus," and "earned surplus" (and often
other types of surplus as well), the net effect of most statutes
was to permit the distribution to shareholders of most or all of
the corporation's net assets- its capital along with its
earnings- if the shareholders wished this to be done. However,
statutes also generally imposed an equity insolvency test on
distributions that prohibited distributions of assets if the
corporation was insolvent or if the distribution had the effect
of making the corporation insolvent or unable to meet its
obligations as they were projected to arise.

The financial provisions of the revised Model Act, which are
based on the 1980 amendments, sweep away all the distinctions
among the various types of surplus but retain restrictions on
distributions built around both the traditional equity insolvency
and balance sheet tests of earlier statutes.

1. The Scope of Section 6.40

Section 1.40 defines "distribution" to include virtually all
transfers of money, indebtedness of the corporation or other
property to a shareholder in respect of the corporation's shares.
It thus includes cash or property dividends, payments by a
corporation to purchase its own shares, distributions of
promissory notes or indebtedness, and distributions in partial or
complete liquidation or voluntary or involuntary dissolution.
Section 1.40 excludes from the definition of "distribution"
transactions by the corporation in which only its own shares are
distributed to its shareholders.  These transactions are called
"share dividends" in the revised Model Business Corporation Act.
See section 6.23.

Section 6.40 imposes a single, uniform test on all distributions.
Many of the old "par value" and "stated capital" statutes
provided tests that varied with the type of distribution under
consideration or did not cover certain types of distributions at
all.

2. Equity Insolvency Test

As noted above, older statutes prohibited payments of dividends
if the corporation was, or as a result of the payment would be,
insolvent in the equity sense. This test is retained, appearing
in section 6.40(c) (1).

In most cases involving a corporation operating as a going
concern in the normal course, information generally available
will make it quite apparent that no particular inquiry concerning
the equity insolvency test is needed. While neither a balance
sheet nor an income statement can be conclusive as to this test,
the existence of significant shareholders' equity and normal
operating conditions are of themselves a strong indication that
no issue should arise under that test.  Indeed, in the case of a
corporation having regularly audited financial statements, the
absence of any qualification in the most recent auditor's opinion
as to the corporation's status as a "going concern," coupled with
a lack of subsequent adverse events, would normally be decisive.

It is only when circumstances indicate that the corporation is
encountering difficulties or is in an uncertain position
concerning its liquidity and operations that the board of
directors or, more commonly, the officers or others upon whom
they may place reliance under section 8.30(b), may need to
address the issue. Because of the overall judgment required in
evaluating the equity insolvency test, no one or more "bright
line" tests can be employed. However, in determining whether the
equity insolvency test has been met, certain judgments or
assumptions as to the future course of the corporation's business
are customarily justified, absent clear evidence to the contrary.
These include the likelihood that (a) based on existing and
contemplated demand for the corporation's products or services,
it will be able to generate funds over a period of time
sufficient to satisfy its existing and reasonably anticipated
obligations as they mature, and (b) indebtedness which matures in
the near-term will be refinanced where, on the basis of the
corporation's financial condition and future prospects and the
general availability of credit to businesses similarly situated,
it is reasonable to assume that such refinancing may be
accomplished. To the extent that the corporation may be subject
to asserted or unasserted contingent liabilities, reasonable
judgments as to the likelihood, amount, and time of any recovery
against the corporation, after giving consideration to the extent
to which the corporation is insured or otherwise protected
against loss, may be utilized. There may be occasions when it
would be useful to consider a cash flow analysis, based on a
business forecast and budget, covering a sufficient period of
time to permit a conclusion that known obligations of the
corporation can reasonably be expected to be satisfied over the
period of time that they will mature.

In exercising their judgment, the directors are entitled to rely,
under section 8.30(b) as noted above, on information, opinions,
reports, and statements prepared by others.  Ordinarily, they
should not be expected to become involved in the details of the
various analyses or market or economic projections that may be
relevant. Judgments must of necessity be made on the basis of
information in the hands of the directors when a distribution is
authorized. They should not, of course, be held responsible as a
matter of hindsight for unforeseen developments. This is
particularly true with respect to assumptions as to the ability
of the corporation's business to repay long-term obligations
which do not mature for several years, since the primary focus of
the directors decision to make a distribution should normally be
on the corporation's prospects and obligations in the shorter
term, unless special factors concerning the corporation's
prospects require the taking of a longer term perspective.


3. Relationship to the Federal Bankruptcy Act and Other
Fraudulent Conveyance Statutes

The revised Model Business Corporation Act establishes the
validity of distributions from the corporate law standpoint under
section 6.40 and determines the potential liability of directors
for improper distributions under sections 8.30 and 8.33.  The
federal Bankruptcy Act and state fraudulent conveyance statutes,
on the other hand, are designed to enable the trustee or other
representative to recapture for the benefit of creditors funds
distributed to others in some circumstances.  In light of these
diverse purposes, it was not thought necessary to make the tests
of section 6.40 identical to the tests for insolvency under these
various statutes.

4. Balance Sheet Test

Section 6.40(c)(2) requires that, after giving effect to any
distribution, the corporation's assets equal or exceed its
liabilities plus (with some exceptions) the dissolution
preferences of senior equity securities.  Section 6.40(d)
authorizes asset and liability determinations to be made for this
purpose on the basis of either (1) financial statements prepared
on the basis of accounting practices and principles that are
reasonable in the circumstances or 2) a fair valuation or other
method that is reasonable in the circumstances. The determination
of a corporation's assets and liabilities and the choice of the
permissible basis on which to do so are left to the judgment of
its board of directors.  In making a judgment under section
6.40(d), the board may rely under section 8.30 upon opinions,
reports, or statements, including financial statements and other
financial data prepared or presented by public accountants or
others.

Section 6.40 does not utilize particular accounting terminology
of a technical nature or specify accounting concepts. In making
determinations under this section, the board of directors may
make judgments about accounting matters, giving full effect to
its right to rely upon professional or expert opinion.

In a corporation with subsidiaries, the board of directors may
rely on unconsolidated statements prepared on the basis of the
equity method of accounting (see American Institute of Certified
Public Accountants, APB Opinion No. 18 (1971)) as to the
corporation's investee corporations, including corporate joint
ventures and subsidiaries, although other evidence would be
relevant in the total determination.


a. Generally Accepted Accounting Principles

The board of directors should in all circumstances be entitled to
rely upon reasonably current financial statements prepared on the
basis of generally accepted accounting principles in determining
whether or not the balance sheet test of section 6.40(c)(2) has
been met, unless the board is then aware that it would be
unreasonable to rely on the financial statements because of
newly-discovered or subsequently arising facts or circumstances.
But section 6.40 does not mandate the use of generally accepted
accounting principles; it only requires the use of accounting
practices and principles that are reasonable in the
circumstances. While publicly-owned corporations subject to
registration under the Securities Exchange Act of 1934 must, and
many other corporations in fact do, utilize financial statements
prepared on the basis of generally accepted accounting
principles, a great number of smaller or closely-held
corporations do not. Some of these corporations maintain records
solely on a tax accounting basis and their financial statements
are of necessity prepared on that basis.  Others prepare
financial statements that substantially reflect generally
accepted accounting principles but may depart from them in some
respects (e.g., footnote disclosure).  These facts of corporate
life indicate that a statutory standard of reasonableness, rather
than stipulating generally accepted accounting principles as the
normative standard, is appropriate in order to achieve a
reasonable degree of flexibility and to accommodate the needs of
the many different types of business corporations which might be
subject to these provisions, including in particular closely-held
corporations. Accordingly, the revised Model Business Corporation
Act contemplates that generally acceptable accounting principles
are always "reasonable in the circumstances" and that other
accounting principles may be perfectly acceptable, under a
general standard of reasonableness, even if they do not involve
the `<fair value" or `<current value" concepts that are also
contemplated by section 6.40(d).


b.  Other Principles

Section 6.40(d) specifically permits determinations to be made
under section 6.40(c)(2) on the basis of a fair valuation or
other method that is reasonable in the circumstances.  Thus the
statute authorizes departures from historical cost accounting and
sanctions the use of appraisal and current value methods to
determine the amount available for distribution. No particular
method of valuation is prescribed in the statute, since different
methods may have validity depending upon the circumstances,
including the type of enterprise and the purpose for which the
determination is made. For example, it is inappropriate in most
cases to apply a "quick-sale liquidation" method to value an
enterprise, particularly with respect to the payment of normal
dividends. On the other hand, a "quick-sale liquidation"
valuation method might be appropriate in certain circumstances
for an enterprise in the course of reducing its asset or business
base by a material degree. In most cases, a fair valuation method
or a going concern basis would be appropriate if it is believed
that the enterprise will continue as a going concern.

Ordinarily a corporation should not selectively revalue assets.
It should consider the value of all its material assets, whether
or not reflected in the financial statements (e.g., a valuable
executory contract).  Likewise all of a corporation's material
obligations should be considered and revalued to the extent
appropriate and possible. In any event, section 6.40(d) calls for
the application under section 6.40(c)(2) of a method of
determining the aggregate amount of assets and liabilities that
is reasonable in the circumstances.

Section 6.40(d) also refers to some "other method that is
reasonable in the circumstances." This phrase is intended to
comprehend within section 6.40(c)(2) the wide variety of
possibilities that might not be considered to fall under a "fair
valuation" or "current value" but might be reasonable in the
circumstances of a particular case.

5. Preferential Dissolution Rights and the Balance Sheet Test
Section 6.40(c)(2) provides that a distribution may not be made
unless the total assets of the corporation exceed its liabilities
plus the amount that would be needed to satisfy any shareholders'
superior preferential rights upon dissolution if the corporation
were to be dissolved at the time of the distribution.  This
requirement in effect treats preferential dissolution rights of
shares for distribution purposes as if they were liabilities for
the sole purpose of determining the amount available for
distributions, and carries forward analogous treatment of shares
having preferential dissolution rights from earlier versions of
the Model Act.  In making the calculation of the amount that must
be added to the liabilities of the corporation to reflect the
preferential dissolution rights, the assumption should be made
that the preferential dissolution rights are to be established
pursuant to the articles of incorporation, as of the date of the
distribution or proposed distribution.  The amount so determined
must include arrearages in preferential dividends if the articles
of incorporation or resolution require that they be paid upon the
dissolution of the corporation.  In the case of shares having
both a preferential right upon dissolution and other
nonpreferential rights, only the preferential right should be
taken into account. The treatment of preferential dissolution
rights of classes of shares set forth in section 6.40(c)(2) is
applicable only to the balance sheet test and is not applicable
to the equity insolvency test of section 6.40(c)(1).  The
treatment of preferential rights mandated by this section may
always be eliminated by an appropriate provision in the articles
of incorporation.

6. Time of Measurement

Section 6.40(e)(3) provides that the time for measuring the
effect of a distribution for compliance with the equity
insolvency and balance sheet tests for all distributions not
involving the reacquisition of shares or the distribution of
indebtedness is the date of authorization, if the payment occurs
within 120 days following the authorization; if the payment
occurs more than 120 days after the authorization, however, the
date of payment must be used. If the corporation elects to make a
distribution in the form of its own indebtedness under section
6.40(e)(2) the validity of that distribution must be measured as
of the time of distribution, unless the indebtedness qualifies
under section 6.40(g).

Section 6.40(e)(1) provides a different rule for the time of
measurement when the distribution involves a reacquisition of
shares.  See below, Application to Reacquisition of Shares-Time
of measurement.

7. Record Date

Section 6.40(b) fixes the record date (if the board of directors
does not otherwise fix it) for distributions other than those
involving a reacquisition of shares as the date the board of
directors authorizes the distribution.  No record date is
necessary for a reacquisition of shares from one or more specific
shareholders.  The board of directors has discretion to set a
record date for a reacquisition if it is to be pro rata and to be
offered to all shareholders as of a specified date.

8. Application to Reacquisition of Shares

The application of the equity insolvency and balance sheet tests
to distributions that involve the purchase, redemption, or other
acquisition of the corporation's shares creates unique problems;
section 6.40 provides a specific rule for the resolution of these
problems as described below.

a. Time of Measurement

Section 6.40(e)(1) provides that the time for measuring the
effect of a distribution under section 6.40(c), if shares of the
corporation are reacquired, is the earlier of (i) the payment
date, or (ii) the date the shareholder ceased to be a shareholder
with respect to the shares, except as provided in section
6.40(g).

b. When Tests Are Applied to Redemption-Related Debt

In an acquisition of its shares, a corporation may transfer
property or incur debt to the former holder of the shares. The
case law on the status of this debt is conflicting.  However,
share repurchase agreements involving payment for shares over a
period of time are of special importance in closely-held
corporate enterprises.  Section 6.40(e) provides a clear rule for
this situation: the legality of the distribution must be measured
at the time of the issuance [or] incurrence of the debt, not at a
later date when the debt is actually paid, except as provided in
section 6.40(g).  Of course, this does not preclude a later
challenge of a payment on account of redemption-related debt by a
bankruptcy trustee on the ground that it constitutes a
preferential payment to a creditor.

c. Priority of Debt Distributed Directly or Incurred in
Connection With a Reacquisition of Shares

Section 6.40(f) provides that indebtedness created to acquire the
corporation's shares or issued as a distribution is on a parity
with the indebtedness of the corporation to its general,
unsecured creditors, except to the extent subordinated by
agreement. General creditors are better off in these situations
than they would have been if cash or other property had been paid
out for the shares or distributed (which is proper under the
statute), and no worse off than if cash had been paid or
distributed and then lent back to the corporation, making the
shareholders (or former shareholders) creditors. The parity
created by section 6.40(f) therefore is logically consistent with
the rule established by section 6.40(e) that these transactions
should be judged at the time of the issuance of the debt.

Chapter 7

SHAREHOLDERS

Subchapter A

Meetings

7.01 Annual Meeting

(a) A corporation shall hold a meeting of shareholders annually
at a time stated in or fixed in accordance with the bylaws.

(b) Annual shareholders' meetings may be held in or out of this
state at the place stated in or fixed in accordance with the
bylaws. If no place is stated in or fixed in accordance with the
bylaws, annual meetings shall be held at the corporation's
principal office.

(c) The failure to hold an annual meeting at the time stated in
or fixed in accordance with a corporation's bylaws does not
affect the validity of any corporate action.

7.02 Special Meeting

(a) A corporation shall hold a special meeting of shareholders:

(1) on call of its board of directors or the person or persons
authorized to do so by the articles of incorporation or bylaws;
or

(2) if the holders of at least 10 percent of all the votes
entitled to be cast on any issue proposed to be considered at the
proposed special meeting sign, date, and deliver to the
corporation's secretary one or more written demands for the
meeting describing the purpose or purposes for which it is to be
held.

(b) If not otherwise fixed under section 7.03 or 7.07, the record
date for determining shareholders entitled to demand a special
meeting is the date the first shareholder signs the demand.

(c) Special shareholders' meetings may be held in or out of this
state at the place stated in or fixed in accordance with the
bylaws. If no place is stated or fixed in accordance with the
bylaws, special meetings shall be held at the corporation's
principal office.

(d) Only business within the purpose or purposes described in the
meeting notice required by section 7.05(c) may be conducted at a
special shareholders' meeting.

7.03 Court-Ordered Meeting
(a) The [name or describe] court of the county where a
corporation's principal office (or, if none in this state, its
registered office) is located may summarily order a meeting to be
held:

(1) on application of any shareholder of the corporation entitled
to participate in an annual meeting if an annual meeting was not
held within the earlier of 6 months after the end of the
corporation's fiscal year or 15 months after its last annual
meeting; or

(2) on application of a shareholder who signed a demand for a
special meeting valid under section 7.02, if:

(i) notice of the special meeting was not given within 30 days
after the date the demand was delivered to the corporation's
secretary; or (ii) the special meeting was not held in accordance
with the notice.

(b) The court may fix the time and place of the meeting,
determine the shares entitled to participate in the meeting,
specify a record date for determining shareholders entitled to
notice of and to vote at the meeting, prescribe the form and
content of the meeting notice, fix the quorum required for
specific matters to be considered at the meeting (or direct that
the votes represented at the meeting constitute a quorum for
action on those matters), and enter other orders necessary to
accomplish the purpose or purposes of the meeting.

7.04 Action Without Meeting

(a) Action required or permitted by this Act to be taken at a
shareholders' meeting may be taken without a meeting if the
action is taken by all the shareholders entitled to vote on the
action. The action must be evidenced by one or more written
consents describing the action taken, signed by all the
shareholders entitled to vote on the action, and delivered to the
corporation for inclusion in the minutes or filing with the
corporate records.

(b) If not otherwise fixed under section 7.03 or 7.07, the record
date for determining shareholders entitled to take action without
a meeting is the date the first shareholder signs the consent
under subsection (a).

(c) A consent signed under this section has the effect of a
meeting vote and may be described as such in any document.

(d) If this Act requires that notice of proposed action be given
to nonvoting shareholders and the action is to be taken by
unanimous consent of the voting shareholders, the corporation
must give its nonvoting shareholders written notice of the
proposed action at least 10 days before the action is taken. The
notice must contain or be accompanied by the same material that,
under this Act,