Business Associations Flashcards
All TX corporations are governed by the:
Texas Business Organizations Code
What do you need to form a corporation in TX?
- Organizer - Executes certificate and delivers to SoS
- Certificate of Formation
- Delivery of signed CoF to SoS and payment of required fee
Once the SoS files and sends acknowledgement, the corporate existence begins
What must be included in the Certificate of Formation?
- Name of corporation (name can be reserved with SoS for 120 days)
- Name and address of each organizer
- Number of initial directors
- Name and address of each initial director (or manager if no Board)
- Name of the corporate agent
- Statement of purpose
- Capital Structure
a) Authorized stock
b) Number of shares per class
c) Info on par value, voting rights, and preferences of each class
Perpetual duration assumed if no duration specified.
Ultra Vires Activities
Activities outside the scope of the corp.’s statement of purpose.
Ultra vires contracts are valid, but shareholders can sue for injunction and responsible managers are liable to corp. for ultra vires loses
Assumed Name Certificate
Must be filed with SoS and county clerk if the corporation will do business under a different name. Cannot sue in TX until filed
Organizational Meeting
Board of Directors will:
- Select officers
- Adopt any bylaws, and
- May transact other company business
Should give 3-days’ notice of meeting
ByLaws
Internal document comprising an operating manual (i.e. record dates, methods of giving notice, etc.).
Can be adopted or repealed by the board or shareholders.
Corporations must have bylaws unless a close corp.
Benefit Corp.
Must say it is a B-Corp. in its Article and file annual report assessing how it pursued its stated social mission.
Double Taxation
Corporations are taxed on profits, then shareholders are taxed on distributions.
S-Corps can avoid tax at the corporate level (must have 100 or fewer shareholders, all of whom are human US citizens or residents, and only one class of stock, which is not publicly traded)
De Facto Corporation Requirements
- Relevant incorporation statute (automatic–TBOC)
- Parties made good faith, colorable attempt to comply with it
- Some exercise of corporate privileges
***This doctrine may be abolished in TX
Corporation by Estoppel
Prevents one who treats a business as a corporation from denying that it is one.
Generally applies only in contract cases.
May be abolished in TX
Promoter
Acts on behalf of a corporation not yet formed (e.g. contracting with third parties)
Corporation not liable for pre-incorporation contracts until adopted either expressly or impliedly by accepting a benefit of the contract.
However, promoter remains liable on the contract until there is a novation (agreement between all three parties that corp. will replace promoter in the contract)
Foreign Corporations
Any corp. incorporated anywhere outside of TX
If transacting business (regularly, not merely sporadically) in TX, must qualify and pay fees in the state.
Must get cert. of authority from TX SoS and prove good standing in home state.
Otherwise, subject to civil fine and unable to sue in TX on claims arising from business in TX
Issuance of Stock
When a corporation sells its own stock
Subscriptions
Signed offers to buy stock from a corporation.
If signed pre-incorporation, irrevocable for 6 months.
Post-incorporation subscriptions revocable until accepted by the corp. and subscriber notified in writing
Subscriber does not become a shareholder until he pays for the stock.
Form of Consideration for Stock
Stock may be issued for any tangible or intangible benefit to the corporation
Amount of Consideration for Stock
Par is the minimum issuance price (note: only applies to issuance not sales by shareholders)
No par stock can be sold at any price set by the Board
Treasury Stock has been reacquired by the corp. (authorized and issued but not outstanding). Treat as no-par stock.
Board’s valuation of a property or service granted in exchange for stock is conclusive, absent fraud
Watered Stock
Deficit between par value and amount received fore stock.
Directors liable for water if they knowingly authorized the issuance.
Buyer liable–no defense
Third-party purchaser not liable if she did not know about the water.
Pre-Emptive Right
Right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock FOR MONEY whenever there is a new issuance (including issuance of treasury stock)
No pre-emptive rights unless the CoF says so and none within 6 months of formation unless specified by the CoF
Election of Directors
Number of directors set in CoF or bylaws
Elected by shareholders at annual meeting
Entire board elected each year unless bylaws provide for a classified board (1/2 or 1/3 elected each year)
Shareholders can remove directors before terms expire with or without cause
If there is a vacancy the Board or the shareholders will decide who serves the remainder of that term.
Directors are not agents of the corporation and have no authority to speak for or bind the corp.
How may the Board take action?
Either by unanimous written consent or at a meeting that satisfies quorum and voting requirements
Directors cannot vote by proxy
Special Meetings
Notice is required and must state the date/time/place of the meeting.
Otherwise actions at the meeting are voidable (or void) unless the unnotified directors waive the notice defect either in writing or by attending the meeting without objecting at the outset
Quorum and Voting
Any meeting of the board requires a majority of all directors for a quorum
To pass a resolution only requires a majority of those present
Duty of Care
Directors owe a duty of care to the corporation. Must act in good faith and exercise ordinary care and prudence.
Non-feasance violates the duty of care, but director will only be liable if his breach caused a loss to the corp.
Misfeasance can violate the DoC, but directors are protected by the Business Judgment Rule
Business Judgment Rule
Presumption that the board acted prudently if its business decision was made in good faith, was informed, and had a rational basis.
Duty of Loyalty
Directors owe the corp. a duty of loyalty. Must act in good faith and with a reasonable belief that actions are in the best interests of the corp.
NO BJR FOR DUTY OF LOYALTY
Interested Director Transactions (self dealing)
Any deal between the corp. and one of its directors (or the director’s relative or other business) will be set aside unless the director shows:
- The deal was fair to the corp. when approved, OR
- Her interest and the material facts were disclosed or known and the deal was approved in good faith by either the shareholders or a majority of disinterested directors
Competing Venture
Directors cannot compete without the approval of a majority of disinterested directors
Remedy: Constructive trust on profits (to corp.)
Corporate Opportunity
Director cannot usurp a corporate opportunity. In order to take advantage of the opportunity, directors must first:
- Tell the board
- Wait for the board to reject the opportunity
Which directors may be liable?
Directors may be liable to the corp. for improper distributions, improper loans (not reasonably expected to benefit the corp.), ultra vires acts, and breaches of fiduciary duties.
Directors are presumed to have concurred with a board action unless dissent or abstention is noted in writing in corporate records (e.g. in minutes, sending note to corp. secretary at the meeting, or sending registered letter to corp. secretary immediately after the meeting)
Not liable if absent from the meeting or agreed based on good faith reliance represented as correct by a competent professional or officer
Officers
Selected and removed by the board.
Act as agents of the corporation.
Must have at least a president and a secretary
Indemnification of D&O
Reimbursement prohibited: Where D&O held liable for willful or intentional misconduct in performing a duty to the corp.
Reimbursement required: When she wins a judgment on the entire case.
Reimbursement permitted: In any other situation. BUT if held liable to the corp. or received improper personal benefit, can only get expenses and attorney’s fees
Indemnification decided by a majority vote of disinterested directors , a disinterested committee, disinterested shares, or independent legal counsel
Company can advance litigation expenses if D&O provides an affidavit of good faith that she complied with the duties of care and loyalty and a written undertaking to repay expenses if determined she did not.
CoF can eliminate D&O liability for damages, but never for willful or intentional misconduct
Shareholder Management Agreement
Sets up alternative management in a close corporation
Can be in the certificate or bylaws if approved by all shareholders or by written agreement of all shareholders.
Each shareholder should receive a copy (but still valid if not) and stock certificates should denote management structure and close corp. status.
Filing copy of SMA with SoS makes it a matter of record and binds all transferees
Do shareholders owe duties to each other in TX?
No.
But the court may find a fiduciary duty where a shareholder is being treated extremely unfairly.
When are shareholders liable for corp. debts?
When the court “pierces the corporate veil.” 2 requirements:
1) Shareholders abused the privilege of incorporating, and
2) Limited liability would be unfair
Classic PCV scenarios:
a. Alter ego theory (treating corp. assets as one’s own to the detriment of creditors)
b. Undercapitalization
Requirements for a Shareholder Derivative Suit
Stock Ownership at the time the claim arose (or received it by operation of law from someone who did)
Must fairly and adequately represent corp. interests throughout the litigation
Must make demand on directors that the corp. bring suit and give directors 90 days to respond to demand. Demand must set forth the nature of the claim with particularity.
Court must approve any settlement or dismissal.
Court MUST dismiss if determination that the suit is not in the corp.’s best interests is made in good faith by independent and disinterested directors.
Shareholder Voting
General Rule: You vote if you are the record shareholder as of the record date
Exceptions:
1. Corporation reacquires stock (shares do not vote)
- If shareholder dies, executor can vote his shares
- Proxy
Proxies
A proxy is a writing signed by the record shareholder, directed to the secretary of the corp., that authorizes another to vote his shares
Can be revoked in writing to the secretary of corp. or by attending the meeting and voting
Proxies can always be revoked unless the proxy says it is irrevocable and it is coupled with an interest
Voting Trusts: Requirements
- Written trust agreement controlling how the shares will be voted
- File a copy with the corp.
- Transfer legal title of shares to voting trustee
- Original shareholders receive trust certificates and retain all shareholder rights other than voting
Voting (Pooling) Agreement
Written agreements entered into by shareholders with copy delivered to corp.
Binding on transferees if conspicuously noted on stock certificate
Must be for a proper shareholder purpose.
How can shareholders take a valid corporate act?
- Unanimous consent in writing and signed by holders of all voting shares
- At a meeting that satisfies voting and quorum rules.
