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UBE Rule Statements > 5. Corporations > Flashcards

5. Corporations Flashcards

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1
Q

What are the requirements of formation of a corporation

A
  1. Entity
  2. Delivers Articles of Incorporation
  3. To secretary of state
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2
Q

What are the required elements of Articles of Incorporation?

A
  1. Name (including indicator of corp)
  2. Name and address of incorporating entity
  3. Name and address of registered agent
  4. Share information (total authorized shares, class information, etc)
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3
Q

What are the differences between a C Corp and S Corp?

A

C Corp

  • what we traditionally know to be a corporation
  • taxation at entity level + distribution level
  • no cap on shareholder type or ownership

S Corp

  • Closely held corporation (not public)
  • No more than 100 shareholders, must be American citizens
  • Only ONE type of stock
  • Tax flows through (no double taxation)
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4
Q

What are the two relief doctrines for defective incorporation?

A
  1. De Facto Corporation (does not protect against State actions)
    a) A valid incorporation statute;
    b) Parties made good faith attempt to comply with;
    c) There has been some exercise of corporation privilege
  2. Corporation by Estoppel
    - Other party estopped from claiming defective incorporation if treated the party as a corporation (CONTRACT LAW ONLY)
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5
Q

What is the rule on pre-incorporation contracts?

A

General rule - corporation is not liable for pre-incorporation contracts unless it ADOPTS the contract by either:

(a) express board ratification
(b) implied adoption by accepting the benefit of the contract

Promotors are always liable for these contracts until NOVATION occurs between corporation and promotor

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6
Q

What are the registration requirements for a foreign corporation to be able to assert claims in a state?

A
  1. File certificate of authority from secretary of state
  2. Provide information on articles and by laws
  3. Prove registration in home state
  4. Appoint registered agent and office in the state
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7
Q

What is the legal ramifications of watered stock (stock sold for less than par)?

A

Corporation is NOT liable for stock that is issued below its explicit par value. The following entities are liable:

    1. Issuing directors
    1. Purchaser of the stock (regardless of actual knowledge)**
    1. Any third party participant who knows of par value
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8
Q

What is a preemptive right?

A

If right is held, it is stated in ARTICLES:
- two elements:
- 1. Allows shareholder to maintain PERCENTAGE ownership;
- 2. On cash issuances only
(basically a right of first refusal)

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9
Q

What are key traits of directors (not including their authority, fiduciary, and voting functions)?

A
  1. Elected annually (if staggered 1/2 elected annually)
  2. Removable with or without cause (if staggered need cause)
  3. Selected by existing board and voted on by shareholders
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10
Q

What are the key traits of director’s ability to bind the corporation through decisions?

A
  1. Single shareholders CANNOT bind the corporation
  2. Have non-delegable duties (can’t delegate vote to a proxy)
  3. Can adopt a resolution EITHER by (a) unanimous written agreement, or (b) at a meeting that satisfies quorum and voting requirements
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11
Q

What are the quorum and voting requirements for a board meeting?

A
  1. Valid quorum = majority of the shareholders (can be broken by leaving the room!)
  2. Voting requirement = majority of the QUORUM
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12
Q

What decisions can a board committee NOT make without a board meeting resolution?

A
  1. Distribute stock
  2. Fill a board vacancy
  3. Recommend a fundamental change to shareholders
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13
Q

What is the corporate director’s fiduciary duty to the corporation?

A
  1. Act in good faith (both);
  2. With the care that an ordinary prudent person would exercise in like circumstances (care);
  3. In a manner the director reasonably believed to be in the best interest of the corporation (loyalty).
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14
Q

What is the business judgment rule?

A
  • If director acted according to the standard of reasonable care and loyalty required, the director’s decision making is PRESUMED to satisfy fiduciary duties, even if there is financial harm to the corporation.
  • Will defend a director from any breaches of the duty of care (places burden on plaintiff)
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15
Q

What are the two types of duty of care breaches?

A
  1. Nonfeasance (doing nothing);
  2. Misfeasance (active mismanagement)

KEY – a director is never liable for breach of care unless the challenger can override the Business Judgment Rule presumption by showing a breach of fiduciary duty.

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16
Q

What is the rule on a self-dealing charge (director directly involved in corporation transaction)

A

Director has BURDEN of proving:

  • (a) the deal was fair to the corporation; OR
  • (b) clear disclosure of conflicted interest and ALL facts; AND (1) the transaction was approved by a majority of disinterested directors (or shareholders)
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17
Q

What is the rule on a charge of competing ventures against a director?

A

NO defense

- Corporation receives constructive trust of profits made from competing venture

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18
Q

What is the rule on a corporate opportunity charge against a director?

A

Director has BURDEN of proving:

    1. He informed the board of the opportunity; AND
    1. They passed it up

if usurped corporate opportunity - must sell opportunity to corporation at cost

19
Q

What is the rule for individual director liability if the board is deemed to have violated fiduciary duty?

A

Director is PRESUMED to concur if attended the meeting.

  • Can overcome presumption by showing dissent in corporate records:
    1. In the meeting minutes;
    1. Delivered to presiding officers;
    1. Written dissent to the corporation after the meeting
20
Q

What is the good faith reliance protection for director liability for fiduciary breaches?

A

Director not liable if can show relied in GOOD FAITH on recommendation provided by other board members or a corporate professional

21
Q

What are the rules on indemnification of a corporate director or officer?

A
  1. No indemnification - director held liable to corp OR received an improper benefit from allegation
  2. Mandatory - director won case
  3. Permissive - director loses despite acting in good faith interest in best interest of company (loyalty)
22
Q

Can a corporation remove liability of its directors?

A

RULE – articles can expressly limit liability. But NOT for the following acts:

    1. Director improperly received benefit not entitled to (self dealing!!!!);
    1. Intentionally harmed the corporation;
    1. Approved unlawful distributions;
    1. Intentionally committed a crime
23
Q

How may an officer of a corporation bind it in contracts?

A

Officers have the SAME authority as agents but also:

- Have implied authority to bind corp in the ordinary course of business

24
Q

How can shareholders in a closely held corporation create a shareholder management agreement?

A

Either:

  1. Unanimous written agreement by shareholders; or
  2. Per the articles of incorporation
25
Q

What are the requirements for piercing the corporate veil (finding shareholders personally liable)?

A
    • closely held corporations ONLY (not public):
      1. Shareholders abused the privilege of incorporation; and
      2. Fairness requires holding SH personally liable
26
Q

What are the two most common actions that justify piercing the corporate veil?

A
  1. Alter ego (using corporate assets as own);

2. Undercapitalization (heavily underfunding the corporation in light of liabilities)

27
Q

What is the key trait of a derivative suit?

A

It must be a claim of action held by the corporation NOT the bringing shareholder(s). If the shareholders have a personal claim, it is not derivative

28
Q

What are the requirements for a shareholder to have the ability to bring a derivative suit?

A
  1. SH must have stock ownership when the claim arose (injury occurred) OR have acquired by operation of law from another who had ownership at time
  2. Must provide adequate representation for the corp
  3. Must make written demand on the board to bring lawsuit (in some states must wait 90 days before proceeding with derivative)
  4. Corporation must be joined as a DEFENDANT
  5. Can only be settled or dismissed by court approval
  6. Court has discretion to dismiss based corporation’s best interests
29
Q

Who may vote in shareholder voting?

A

The RECORD shareholder of an outstanding share.

- Record = registered owner on the corporate record on the record date before voting

30
Q

What are the exceptions to the record shareholder vote rule?

A
  1. corporation reacquired the stock - no one votes

2. voting by proxy

31
Q

What are the traits of voting by proxy?

A

Elements for valid proxy document:

  1. Writing
  2. Signed by record shareholder
  3. Directed to secretary of corporation
  4. Authorized another to vote the shares

Traits

  • Lasts 11 months
  • Freely revocable by writing to secretary or attending and voting
  • CAN be irrevocable if proxy holder has interest in the shares other than voting
32
Q

Who can call a special shareholder meeting (not the annual one)?

A
  1. the board
  2. the president
  3. holders of at least 10% of outstanding shares
  4. anyone authorized under the bylaws
33
Q

What are the notice requirements for a shareholder meeting?

A
  1. Writing
  2. To all voting shareholders
  3. Delivered 10-60 days in advance
  4. Details of meeting (time and palace)
  5. For special meetings –> state PURPOSE
34
Q

What comprises a shareholder quorum?

A

Majority of outstanding SHARES (not shareholders) – corporate quorum cannot be lost

35
Q

What are the shareholder voting threshholds?

A
  1. Elect director - plurality of quorum
  2. Remove director - majority of quorum
  3. Other matters (NOT fundamental changes) - majority of shares that VOTE on the issue
  4. Fundamental changes - majority of all votable shares
36
Q

When is a right of first refusal enforceable?

A
  1. Selling shareholder knew about the restriction; and

2. It was on the stock certificate

37
Q

When is a shareholder permitted to inspect corporate records?

A
  1. For non-controversial – right is total with five day’s notice
  2. for non-controversial – right is established with five day’s notice AND statement of proper purpose of inspection (rights/duties of a shareholder)
38
Q

What is the standard for evaluating corporate distribution decisions?

A

All distributions are at DISCRETION of board and thus cannot be compelled absent showing of ABUSE OF DISCRETION

39
Q

What is the limit on a corporation’s ability to distribute profits to shareholders?

A

Corporation MAY NOT distribute if (a) insolvent; or (b) distribution would render insolvent

Insolvent = (a) cannot pay debts; and (b) liabilities are greater than assets

Improper distribution creates liability for directors (joint and several)

40
Q

What are the requirements for a fundamental corporate change?

A
  1. Board resolution (per board voting requirements);
  2. Board written notice to shareholders;
  3. Shareholder majority vote of ALL votable shares;
  4. Delivery of documents to secretary of state
41
Q

What are considered fundamental corporate changes?

A
  1. Amending articles of incorporation;
  2. Merging with another company;
  3. Transfer of all assets;
  4. Convert to another form of businesses;
  5. Dissolution
42
Q

What is a shareholder right of appraisal?

A

Shareholder can force corporation to buy stock if does not agree with fundamental change IF:

    1. Written notice of objection and intent to demand payment;
    1. Actually vote against or abstain;
    1. Written demand to be bought out
43
Q

What are the steps of liquidation of a corporation?

A
  1. Notice to creditors and published notice;
  2. Gather assets
  3. Liquidate all assets for cash
  4. Pay creditors
  5. Distribute balance to shareholders by PRO-RATA unless there is a liquidation preference in articles, then prioritize

UBE Rule Statements (14 decks)

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