BA Flashcards
When is a corporation formed
Generally, a corporation is formed when the AOI are filed with the secretary of stae, unless the articles specify a delayed effective date
Requirements for AOI
The AOI must set forth the following:
- name of the corp
- maximum # of shares the corp is authorized to issue; and
- the names/addresses of the first BOD, incorporators, and the initial registered agent
Amendments to AOI
The AOI may be amended if there is a majority vote from the directors and shareholders. Minor amendments may be made by the BOD without SH approval
Corporate bylaws
Corporate bylaws are the written rules of conduct that must be initially adopted by the incorporatoprs or BOD. Generally, bylaws provide for the ordinary business conduct of the corporation
What kind of provisions can bylaws have
Corporate bylaws may contain any provision for managing the business and regulating the affairs of the corporation to the extent they are consistent with the law and AOI
Conflicts between bylaws and AOI
When there is a conflict between the bylaws and the AOI, the AOI govern
Amendments to the bylaws
Bylaws may be amended or repealed by the corporation’s SHs. The BOD may also amend or repeal bylaws unless the SH expressly specify otherwise
Promoter
A promoter acts on behalf of a corporation that is yet to be formed.
Promoter liability
A promoter is personally liable for any contracts entered into on behalf of the corporation so long as both parties to the transaction know that the corporation has not yet been formed.
When will a promoter not be held personally liable
A promoter will not be held personally liable if
- there is a novation where the parties agree to release the promoter from liability in favor of holding the corp liable; or
- the promoter is able to obtain indemnity from the corporation, which usually requires that the promoter not violate any fiduciary duties
Corp’s preincorporation liability
A corp is not bound by any preincorporation contracts that were entered into by promoters unless the corp adopts such contracts. An adoption can be express or implied from the actions of the corp or its agents
SH liability
Generally, SHs of a corporation are not personally liable for the debts of the corporation. However, the major exception to this is the doctrine of piercing the corporate veil.
Piercing the corporate veil
Courts will allow creditors to pierce the corporate veil and hold a SH personally liable when (i) the SH has dominated the corp to the extent that the corp is an alter ego of the SH; (ii) the SH failed to follow corporate formalities; (iii) the corporation was undercaplitalized at its inception; or (iv) there is fraud or illegality present
Passive investor liability once veil is pierced
Once the corporate veil has been pierced, courts generally hold all the SHs liable. However, some courts do not extend liability to passive investors
Common stock
- Common stock is a security that represents ownership in a corporation
- Holders of common stock exercise control by electing a board of directors and voting on corporate policy
- Common stockholders have the lowest priority in the ownership structure
Preferred stock
- Preferred stock is another kind of security that represents ownership in a corporation.
- Preferred stock does not always have voting rights
When are shares of stock preferred
Shares of stock are preferred if their holders are
- entitled to receive payment of dividends before any payment of dividends to another class of stockholders; or
- entitled, in the event of liquidation or dissolution, to receive any payments or distributions before another class of shareholders
Authorized shares
Authorized shares are the maximum # of shares that a corporation is legally permitted to issue under its articles of incorporation
How can a corp issue more authorized shares than their AOI allow
In order to increase the amount of authorized shares, the AOI must be amended with majority vote from the directors and SHs
Outstanding shares
Outstanding shares are the total number of shares issued by a corp and held by the shareholders.
Voting rights of outstanding shares
Generally, each outstanding share is entitled to one vote (regardless of class), unless otherwise provided in the AOI
Treasury stock
Treasury stock are shares that a company issued and subsequently reacquired. Shares that the corporation reacquired are not considered outstanding and cannot be counted in a SH vote
Options to purchase shares
A corporation may issue options for the purcahse of its shares on certain specified terms that are determined by the corporation’s BOD.
Rights requirements for shares within a class
All shares within a class of stock must have identical rights and preference unless the shares within a class are divided into separate series
Preemptive right
A preemptive right is a right of a current SH to purchase additional shares in the corp before outsiders are permitted to do so in order to maintain their percentage of ownership in the corporation.
“opting in” to create preemptive rights
In most states, a corporation must “opt in” to create preemptive rights by expressly including such rights in the corporation’s AOI
States without “opting in” to create preemptive rights
In some states, preemptive rights are presumed to exist unless the corporation “opts out” by expressly barring such rights in their AOI
When do preemptive rights not exist
Unless otherwise set forth in the AOI, preemptive rights do not exist for
- preferred shares that cannot be converted to common stock
- shares sold for consideration other than cash
- shares issued by majority SH vote to directors, officers, or employees
Distribution rights of SHs
Unless otherwise set forth in the AOI, a SH does not have any right to receive distributions from the corporation. Dividends and distributions are generally paid to SHs at the full discretion of the BOD
What if the BOD refuses to issue distributions in bad faith?
If the BOD refuses to issue distributions in bad faith, but not necessarily in bad judgment, the SHs may be able to compel distribution
Consideration for shares
- the BOD may authorize issuance of shares for consideration of any tangible or intangible property or benefit to the corporation
- absent bad faith or fraud, the judgment of the BOD as to the consideration received is conclusive.
Annual meeting of SH
A corp must hold an annual meeting of SHs at a time that is stated or fixed in accordance with the bylaws
When can special SH meetings be called
Special meetings of SHs can generally be called by
- persons authorized under the AOI
- a demand from SHs that account for at least 10% of the votes entitled to be cast at the meeting; or
- the BOD for limited purposes (e.g., dissolution of the corp)
Notice of SH meetings
Generally, SHs who are entitled to vote must be provided with notice of all annual and special meetings.
Notice for SH special meetings
For special meetings, the notice must
- state the purpose of the meeting; and
- be provided between 10-60 days in most states
Quorum for SH meetings
A quorum must be present in order for the SHs to take action at a meeting. Unless otherwise set forth in the AOI, a quorum exists when at least a majority of shares entitled to vote are present
Non voting shares
The AOI may provide that holders of certian types of shares cannot vote unless specific conditions are satisfied. However, such SHs are still entitled to receive notice even though their shares have nonvoting status
Weight of SHs vote
Unless otherwise provided by law or AOI, all SHs votes are counted equally, regardless of class
Record date
A SH is only entitled to vote if they acquired voting shares before a designated record date. Generally, the record date may be designated in the bylaws no more than 70 days prior to the SH meeting.
Cumulative voting
- SHs may elect directors directly (1 share = 1 vote) or cumulatively. Cumulative voting is usually more favorable to minority SHs.
- In cumulative voting, voters cast as many votes as there are seats, and they are not limited to giving only one vote to each candidate.
vote by proxy
- a vote by proxy allows a SH to vote without physically attending the SH meeting by authorizing another to vote on their behalf
- a valid proxy must exist in the form of a verifiable transmission or a signed written appointment form
Revocability of proxies
A proxy is freely revocable unless the recipient of the proxy has an economic interest in the shares
Inspection of books by SH
A SH possesses the right to inspect corporate books and records so long as the inspection is for a proper purpose,
What is a proper purpose for SH inspection
- In order to be proper, the purpose for inspection must be reasonably related to a person’s interest as a SH
- HOWEVER, a SH may inspect the AOI and bylaws without providing a proper purpose
Procedural requirements to inspect books
Generally, a SH must
- make written demand to inspect and allow the corporation a reasonable amount of time to respond (usually 5 days); and
- conduct the inspection during regular business hours at the corporation’s principal office
Authority of Ds
Subject to any limitation imposed by law or the AOI, the BOD has full control over the affairs of the corp
Quorum for BOD action
- A quorum must be present in order for the Ds to take action or vote
- Unless otherwise set forth in the AOI, a quorum exists when at least a majority of Ds are present
- Ds are considered present so long as all Ds participating can simultaneously hear each other
Action in writing by BOD
The BOD may take action without a quorum present so long as they have unanimously consented to the action in writing
Notice for directors
- It is presumed that directors have notice of regular meetings
- For special meetings, directors must be given 2 days notice, which includes information about the time, location, and date of the meeting. However, such notice is not required to provide the special purpose of the meeting
Authority of officers
- The BOD generally delegates day to day management of the corp’s business to officers elected by the BOD
- The BOD may remove officers at any time with or without cause
- However, such removal may result in a K action if the BOD is violating an employment agreement
Duty of care by D and O
Directors and officers owe the corp a fiduciary duty of care. This duty includes
- the duty to take reasonable steps to monitor the corp’s management
- the duty to be satisfied that proposals are in the corp’s best interests
- the duty to disclose material information; and
- the duty to make reasonably informed decisions (D/Os may rely on information from others who them reasonably believe are reliable)
BJR
In suits alleging that a director or officer violated a duty of care owed to the corporation, courts will apply the business judgment rule.
Effect of BJR
Under the business judgment rule, a court will not second guess the decisions of a director or officer so long as the decisions are made (i) in good faith, (ii) with the care of an ordinarily prudent person in a like position under similar circumstances; and (iii) in a manner the director/officer reasonably believes is in the best interests of the corporation.
Liability under the BJR
- If a D/O breaches the duty of care, they may be held personally liable for damages.
- A corp’s AOI may reasonably limit the liability of Ds and Os for bad judgment, but not for bad faith misconduct
When does a D/O have a COI
A D/O has a conflicting interest in a transaction when they or a family member either
- is a party to the transaction; or
- has a beneficial financial interest in the transaction of such significance to the D/O that the interest would reasonably be expected to exert an influence on the D/O’s judgment if called upon to vote on the transaction
Safe harbors for COI
A D/O that enters into a conflicting interest transaction may be protected from liability if
- disinterested SHs approve the COI transaction
- the non interested members of the BOD authorize the conflicting transaction
- the transaction, judged according to circumstances at the time of commitment, is established to have been fair to the corp
Corporate opportunity doctrine
The corporate opportunity doctrine prohibits directors and officers from usurping business opportunities that rightfully belong to the corp for their own benefit
Merger
A merger occurs when one of two existing corporations is absorbed by the other one.
Conslidation
A consolidation occurs when two existing corps combine into one new corp
Requirements for merger and consolidation
A merger or consolidation both require
- the recommendation of an absolute majority of the BOD
- the agreement of each corporation by an absolute majority of SHs
Short form mergers
in many states, if a parent corporation owns at least 90% of the stock of a subsidiary, the subsidiary may be merged without the approval of SHs of either corporation
Dissenter’s rights
After a merger or consolidation takes place, dissenting SHs opposed to the merger or consolidation may either
- challenge the action; or
- receive payment determined at the FMV of their shares immediately before the merger/consolidation took place.
A SH who opts to receive FMV for shares loses the right to challenge the action absent a showing of fraud
Sale of substantially all corporate assets
- SH approval is required for the corp to sell, lease, exchange, or otherwise dispose of all or substantially all of its property if the disposal is not in the corp’s usual and regular course of busines
- however, if the disposal of assets is in the regular course of business, SH approval is not required
Derivative claims
- A derivative claim is a lawsuit brought by a SH on behalf of the corp
- the SH is suing to enforce the corp’s rights when the corp has a valid COA, but has failed to pursue is
Demand requirement for derivative lawsuit
- Generally, a SH must make a written demand on the board before commencing a derivative action
- after submitting the demand, the SH must wait 90 days unless the BOD rejects the demand within that period
Futile demand
Under CL, and in some JDXs today, the plaintiff SH does not have to make a demand on the BOD if it would be futile to do so
damages for a derivative claim
- if a derivative claim is successful, the proceeds go to the corporation, not the SH who brought the action.
- however, if the award to the corp benefits the defendants, the court may order damages paid to the SH directly
