BAR ESSAY Flashcards
Mandatory Items for Certificate of Formation
Name of the corporation; the nature/purpose of the biz; number of the shares that the corporation is authorized to issue and their par value; the types of shares (if more than one), their privileges and par values; duration (if not indefinite); name and address of the corporate agent; corporate offices; names and addresses of all the organizers; and the number of initial directors, their names, and addresses.
Organizer
The person who puts together the certificate of formation; must sign the CoF.
Name Requirements
The name of a corporation must contain the word “corporation,” “incorporated,” or “company,
or an abbreviation of those words. The chosen name of a corporation may not be the same as or deceptively similar to the name of another registered business entity doing business in Texas, unless the other entity consents in writing. The corporation may not choose a name that contains any word or phrase that indicates or implies that the entity is engaged in a business that the entity is not authorized by law to pursue.
The issuance of stock must be authorized by…
the board of directors. In Texas, shares may be issued by a corporation in exchange for any benefits to the corporation, including cash, promissory notes, services already performed, and contracts for services to be performed. The full consideration agreed upon must be received by the corporation before the shared may be issued.
Who sets the price at which the corporation sells its shares?
The board of directors sets the price at which the corporation sells its shares.
A corporation may, but is not required to, issue par-value stock. For such stock, the corporation is required to…
receive at least the value assigned to that stock, which not need be, and almost always is not, its market value, and which can even be a nominal amount. When a corporation does not receive consideration at least equal to par value, the stock is characterized as “watered stock.” The shareholder of watered stock is liable to the corporation’s creditors for the difference between par value of the stock and the amount paid for the stock.
Preemptive Rights give the shareholder…
Give the shareholder the ability to purchase newly issued stock in proportion to the shareholder’s existing ownership in the corporation. Corporations formed after September 1, 2003 must provide for preemptive rights expressly in the certificate of formation. A shareholder may waive his preemptive rights. A waiver of the right to exercise a preemptive purchase is irrevocable if in writing, but it may be revoked if made orally.
Preemptive rights allow a shareholder…
to purchase stock in proportion to their current ownership in the company. Current ownership applies to the shares outstanding. Preemptive rights apply only to stock issued for cash. They do not exist for (i) stock issued for services or property, (ii) stock sold or granted as compensation to directors, (iii) stock issued within six months of incorporation, or (iv) preferred shares or non-voting shares.
Board of directors duty of care.
The board of directors of a corporation owes a duty of care to the corporation. In exercising this duty, the board of directors is authorized to rely on expert opinion regarding the appropriateness of its activities in managing and running the corporation.
Directors are selected by…
the shareholders at the annual shareholders’ meeting if a quorum is present. However, if there is a vacancy on the board, including a vacancy created by an increase in the amount of directors, either the shareholders or the directors may fill the vacancy. When the vacancy leaves the board without a quorum, the directors remaining may elect a replacement director by majority vote.
Regular vs. Special Meetings as pertaining to notice
Regular: directors not entitled to notice unless the bylaws so require;
Special: director is statutorily entitled to notice; notice must specify the date, time, and place of the meeting, but there is no requirement that the notice specify the purpose of the meeting. There is no statutory restriction on the method by which the directors can receive notice of a directors’ meeting. Unless prohibited by the CoF or other agreement, notice by e-mail or facsimile is valid if the director consents.
A director’s presence at a meeting constitutes waiver of notice unless…
the director attends for the express purpose of objecting to the meeting.
For the board of directors’ acts to be valid…
a quorum of directors must be present at the meeting. A majority of the board constitutes a quorum unless the certificate of formation or bylaws require a different number. The CoF or bylaws may never set a quorum at less than one-third of the number of directors, but they may provide that a quorum is less than a majority.
A director may incur liability for illegal or improper actions taken by the board, even though the director does not vote in favor of the action. To prevent such liability, the director must:
(1) ensure that his dissent or abstention is noted in the minutes of the meeting; or (2) not vote in favor of the action and deliver written notice of his dissent to the presiding officer of the meeting before its adjournment or to the corporation via registered mail immediately after adjournment of the meeting.
A corporation is required to indemnify an officer for:
any expense, including court costs and attorney’s fees, incurred in the successful defense of a proceeding against the office in his role as an officer. Indemnification is required whether the defense is successful on the merits or for a procedural reason.
A corporation MAY indemnify an officer when:
(1) the officer acted in good faith with the reasonable belief that his conduct was in the best interest of the corporation, or that his conduct was at least not opposed to the best interest of the corporation; and (2) in the case of a criminal proceeding, the officer did not have reasonable cause to believe his conduct was unlawful. A corporation may indemnify a director or officer for all amounts expended, including unreasonable expenses. However, if liability was imposed in a derivative action, or a personal benefit was improperly received, only reasonable expenses may be indemnified.
A corporation has several statutory powers to carry out its business and affairs. The powers of a corporation include:
the power to make contracts and guarantees; lend money to its managerial officers, owners, members, and employees, as necessary or appropriate if the loan or assistance reasonably may be expected to benefit the entity; pay pensions and establish profit-sharing plans; make donations for the public welfare or for a charitable purpose; and take other action necessary or appropriate to further the purpose of the corporation.
A director owe’s two basic duties to a corporation:
(1) duty of care; and (2) duty of loyalty. In discharging these duties, a director is required to act in good faith. Traditionally, the duty of care has been defined as the duty to act with the care of an ordinarily prudent person in a like position and similar circumstances. The duty of loyalty requires a director to act in a manner that the director reasonably believes is in the best interest of the corporation.
Merger and dissent.
A merger is a fundamental change in the corporation in which two or more corporations combine, resulting in one surviving entity. Any shareholder who objects to the merger may dissent and force the corporation to buy his stock at fair value as determined by an appraisal. Any person who holds shares in the corporation that is a party to a merger may dissent. However, when a corporation’s shares are listed on the national securities exchange, or held of record by more than 2,000 shareholders, a shareholder does not have the right to dissent to the fundamental change because he has an opportunity to sell stock at its fair value.
How to exercise right of appraisal by shareholders.
To exercise the right of appraisal, the dissenting shareholder must follow the procedure set out by state law. First, the dissenting shareholder must give notice of his dissent to the president and secretary of the corporation, stating that the owner’s right to dissent will be exercised if the action takes effect. The notice must include the address to which notice of effectiveness of the action should be delivered or mailed. The notice of dissent must be submitted to the entity’s principal executive offices before the meeting. When the proposed corporate action is submitted to the shareholders for approval, the dissenting shareholder may not vote in favor of the action in person or consent to the action approved in writing. After the merger is approved, the shareholder must make a written demand for payment. The demand must (i) be addressed to the president and secretary of the responsible organization, (ii) demand payment of the fair value of the ownership interests for which the right of dissent and appraisal are sought, (iii) provide to the organization an address to which a notice relating to the dissent and appraisal procedures may be sent, and (iv) state the number and class of the ownership interests of the domestic entity owned by the owner and the fair value of the ownership interests as estimated by the owner. The demand for payment must be delivered to the responsible organization at its principal executive offices no later than 20 days after receiving notice that the action was approved. Within 20 days after an owner makes a demand, the owner must submit to the responsible organization any certificates representing the owner’s ownership interests. The corporation must respond to the shareholder’s demand for payment within 20 days after receiving the demand. If the corporation accepts the amount claimed, it must pay the amount within 90 days after the proposed action is approved. The corporation may also counter the shareholder’s estimate of fair value with its own estimate. If the parties come to an agreement on fair value, the amount must be paid within 120 days after the agreement is reached. If the shareholder and the corporation do not agree on a price of the stock, the fair value of the stock may be determined through a court action.
De jure corporation
Assuming this doctrine has not been abolished in Texas, a de jure corporation is created when all of the statutory requirements for incorporation have been satisfied. A corporation’s failure to comply with a mandatory statutory provision precludes de jure status.
De facto corporation
Even if a CoF does not completely comply with the statute, organizers may avoid personal liability for the corporation’s liabilities under the de facto corporation doctrine, if it has not been abolished in Texas. There are three requirements for the common-law doctrine of de facto corporation: (a) a statutory law for formation fo a corporation; (2) a good faith effort to comply with the law; and (3) the owners and operators must operate under the corporate name.
Close Corporation
A close corporation refers to a corporation with only a few shareholders and a more relaxed style of governance. Often shareholders serve as both directors and officers of the corporation. The stock of a closely held corporation is not publicly traded. A close corporation may be managed according to a shareholder’s agreement rather than by a board of directors or bylaws. The shareholders may agree to limit the conditions under which shares may be transferred or sold, apportion profits and losses in a specific manner, or set terms and conditions for ownership or management positions.
A close corporation must explicitly state in its CoF that…
“this is a close corporation.” There are no limitations regarding the number of shareholders that a close corporation may have.
