Business Associations Flashcards
Characteristics of corporations
(1) perpetual or continuous existence
(2) centralized management of its assets through board of directors
(3) limited liability for its owners, who are generally shielded from personal liability
(4) free transferability of ownership interests
Corporate structure
Shareholders elect board of directors. Board has responsibility for governing corporation and appoints officers. Officers are delegated responsibility for managing conduct of corporate business.
One person can fit each role
Promoters
Promoters take preliminary steps for creating corporation (i.e., contracts for benefits of future corporation) but are not agents. No power to bind, and promoters are personally liable unless contract specifically disclaims liability or circumstances demonstrate that other party agreed to look only to corporation for performance.
If more than one promoter, there is mutual agency (partnership type relationship), who are jointly and severally liable.
Corporation liability on pre-incorporation contract
Corporation only liable if it assumes liability through adoption or novation.
Adoption: Express occurs through resolution. Implied occurs when corporation accepts or acknowledges benefits of contract. Promoter remains liable but entitled to indemnification.
Novation: All parties agree to substitute corporation as party in place of promoter. Promoter released from all liability.
Requirements for incorporation
Must execute and file articles of incorporation, signed by incorporator and delivered to secretary of state.
Must contain: Name/address of incorporator, address of initial registered office and name of initial registered agent, number of shares corporation is authorized to issue, corporate name (distinguishable from others).
Secretary of state’s filing is conclusive proof that all conditions satisfied
Completing corporate organization
After incorporation, corp. must be properly organized, otherwise personal liability can result. Organization occurs at organizational meeting called by incorporators or initial directors (if named). Must name/elect directors, appoint officers, and adopt bylaws (i.e., record date).
Act of board of directors
Board acts in collective capacity, so all board action require quorum–majority unless provided otherwise. Act of board occurs upon affirmative vote of majority of directors. In absence of meeting, board can transact business as long as there is written consent to action signed by all members.
Board meeting
Regular meetings may be held without notice. Special meetings require at least two days notice of date, time, and place. No notice of purpose required unless removal of director is to be considered.
Waiver of notice occurs if director does not make prompt objection to meeting, or by means of signed writing.
Authority of corporate officers
Officer has powers of an agent–may enter into any transaction for which they have been expressly or implicitly authorized under articles, bylaws, employment contract, or board resolution. Board has discretion to decide whether to declare dividend (unless refusal amounts to fraud, bad faith, or abuse of discretion)
Doctrine of ultra vires
Corporation cannot be obliged to undertake contract or activity beyond scope of its powers. Limits of authority may be challenged in proceeding by (1) shareholder to enjoin act (2), or the corporation against director, officer, employee, or agent; or AG if articles obtained through fraud or corporation has continued to exceed or abuse authority.
Fiduciary duty of directors and officers
Duty of care: Discharge of duty in good faith, with care of an ordinary prudent person in a like position under similar circumstances, in manner reasonably believed to be in best interest of corporation.
Duty of loyalty: Must be loyal to corporation and not promote own interests in a manner injurious–i.e., self dealing, usurpation, direct competion
Conflicting interest transaction
Transaction between director or officer and corp., where director or officer had knowledge and a material financial interest. Voidable unless interested person can prove, that (1) material facts were disclosed and transaction approved by majority of disinterested board or shareholders, or (2) court determines transaction was fair and reasonable to corporation, based on what might have been obtained in arms-length transaction
Corporate management liability
Directors and officers liable for violation of fiduciary duties, and authorized actions
Business judgment rule
Rebuttable presumption that, when making business decision, directors and officers have acted on informed basis, in good faith, with honest belief. Applies to LLCs and corporations
Corporation by estoppel
When contractual dispute arises between third party and an entity believed to be a corporation, a court may estop (1) third party from alleging that corporation is defectively incorporated if that would unjustly expose principles to liability, or (2) business entity from alleging that it is not legally a corporation liable on the contract if that would unjustly deprive third party of relief.
De facto corporation
If statutory compliance is insufficient for de jure status, a de facto corporation may exist if (1) a good faith, colorable attempt was made to comply with incorporation, and (2) corporate principles in good faith acted as if they were a corporation.
Power of shareholders
Shareholders in collective capacity have power to elect/remove directors, amend bylaws, and approve fundamental changes in corporation (amendments to articles, dissolution, sale of corporate assets). Shareholder action occurs at shareholder meetings, must have timely notice. Shareholder resolutions generally recognized as fundamental right under common law.
Cumulative voting
Shareholder may allocate all their votes to any candidate when there are multiple openings on the board. Default is “straight” voting, where shareholders may not give more than one vote per share to any single nominee.
For removal, no director can be removed if votes against removal would be sufficient to elect him under cumulative voting)
Mergers
Shareholder meeting to vote on merger must provide notice that the plan is being considered. Quorum must vote to consider merger then approve merger.
Exception if (1) corporation will survive merger, articles won’t change, merger will not change number of chares or rights of those shares, and issuance of shares does not otherwise require shareholder approval; or (2) for parent corporation and subsidiary, no approval from subsidiary if parent owns at least 90% of voting power of subsidiary.
