Business Associations: Corporations Flashcards
pre-incorporation:
promoters:
-definition; corporation liability; promoter liability;
-definition: persons acting on behalf of an unformed corporation.
-corporation liability for promoter’s contracts: when the corporation adopts by express adoption by BOD resolution or implied adoption (knowledge & accepts benefits)
-until novation; solely liable if corporation is never formed
pre-incorporation: promoters
-duties
-promoters: duties: promoter is a fiduciary, no secret profits.
-If property is acquired before formation & sold to the corporation: then profit is recoverable if sold for more than fair market value
-if property is acquired after & sold to the corporation: then any profit is recoverable
pre-incorporation: subscribers
-definition; limitation
-subscribers: a written agreement to buy stock from an unformed corporation
-limitation: subscription agreement is irrevocable for 6 months
formation requirements: De Jure (A PAIN)
-Authorized shares: number, classes, and series
-Purpose: general purpose with perpetual duration valid and presumed, unless specific statement of purpose or limited duration is expressed.
—-if a specific purpose, activities that are beyond the scope are Ultra Vires activities. Ultra Vires contracts are valid. Shareholders can seek an injunction. The corporation can sue the responsible directors and officers for losses bc of Ultra Vires acts.
-Agent: and address of registered office
-Incorporators: incorporators names and addresses
-Name: name of the corporation, with some indicia of corporation’s status (inc. or corp.)
de facto corporation: definition
de facto corporation is a business that doesn’t fulfill the filing formalities but may nonetheless be treated as a corporation if the organizers have made a good faith, colorable attempt to comply with the corporate formalities and have no knowledge of the lack of corporation status.
legal significance of a corporation
the corporation is a separate legal person; Shareholders are not liable for debts of the corporation bc of limited liability. Shareholders are only liable for the price of their stock
piercing the corporate veil: definition; requirements; who is liable
-piecing the corporate veil: to avoid fraud or unfairness and to render Shareholders liable to 3rd party victim.
-requirements: Shareholders treat the corporation as their alter ego by failing to observe sufficient corporation formalities OR the corporation is undercapitalized (fails to maintain sufficient funds for foreseeable liabilities)
-who is liable: Shareholders who are active in the operation of the corporation, or the Directors and Officers. The Courts are more willing to pierce for a tort victim than a contract claimant.
foreign corporations
a corporation which is incorporated outside of the state engage in intrastate business must file certificate of authority, including all A PAIN info.
Issuance of Stock:
Consideration: types
money, binding obligation to perform future services with an agreed value, tangible/intangible peroperty; services already performed.
Par Value
the minimum issuance price. No par value means any valid consideration BOD deems adequate
Treasury Stock
stock that was previously issued and reacquired and re-sold as no par.
Acquiring property with par value stock
ok if the BOD values the property in good faith as at least par value
Consequences
if less than par value, Directors are liable for signing off on below par issuance and Purchaser bc Shareholders must pay full consideration for shares.
issuance of stock: preemptive rights
right to maintain % of ownership each time new issuance is release. Must be expressly granted in articles
Action and Liability of Directors and Officers:
Statutory Requirements
BOD must have 1 member; Shareholders elect Directors; Shareholders can remove Director for any reason.
Valid meeting required for BOD Actions
unless unanimous Director consent in writing to act w/o a meeting. Notice can be set in bylaws.
-No proxies or voting agreements.
quorum: definition
majority. Vote: majority of the votes are present. Each Director is presumed to concur with the BOD action unless dissent/abstention in writing.
Liability of Directors to Corporation and Shareholders:
Directors have the duty to manage the corporation, but are protected by the Business Judgment Rule.
-But, they are fiduciaries who owe a duty of care and loyalty
The Business Judgment Rule
a presumption that the Directors manage the corporation in good faith and in the best interest of the coporation
Duty of Care
the Director must act with the care a prudent person would use with respect to her own business, unless articles have limited Director liability for breach
Duty of Loyalty
Director may not recieve an *unfair) benefit to the detriment of the corporation or Shareholders, unless there has been a material disclosure and independent ratification.
Duty of Loyalty:
-self dealing
-usurping corporate opportunities
-Director receives unfair benefit in a transaction with the corporation
-Director recieves an unfair benefit by usurping an opportunity that the corporation would have pursued.
Duty of Loyalty:
-self dealing
-usurping corporate opportunities
-Director receives unfair benefit in a transaction with the corporation
-Director receives an unfair benefit by usurping an opportunity that the corporation would have pursued.
ratification: defend a claim by (a) (b) (c)
defend a claim by (a) majority vote of independent directors; (b) a majority vote of a committee of at least 2 independent Directors; (c) majority vote of shares held by independent Shareholders.
ratification: Interested Director Doctrine
-Common law: the transaction with the interested Director is voidable at the corporation’s option
-Modern: the contract is invalid unless, BOD approves the transaction after disclosure and Director doesn’t vote; Shareholders approve the contract after disclosure; or the contract is fair
Officers: duties; agency; required positions; selection and removal
-duty of care and loyalty
-Officers are agents of the corporation and bind the corporation by authorized acts
-requirements: president, secretary, and treasury
-selected and removed by Directors
indemnification: definition; never indem; always indem; may indem
-who decides?
-indemnification for costs, attorney fees, fines, judgment or settlement in the course of corporation’s business.
-never: indem when Director and Officers lose the suit
-always: indem if Director and Officers win the suit
-may: indem if liability to 3rd parties or settlement with corporation; Directors and Officers shows the action was in good faith and conduct is in the corporation’s best interest
-who decides?: majority of independent Directors; Majority of committee of independent Directors; Majority of shares of independent Shareholders; Board pursuant to independent Legal Counsel’s recommendation
Rights of Shareholders:
-direct action
direct action: the Directors breached a fiduciary duty owed to individual as Shareholder
derivative suits: definition; requirements
-Shareholder suing to enforce the corporation’s own cause of action
-requirements: contemporaneous stock ownership when claim arose and throughout litigation adn demand on BOD that they cause corporation to bring suit
derivative suits: definition; requirements
-Shareholder suing to enforce the corporation’s own cause of action
-requirements: contemporaneous stock ownership when claim arose and throughout litigation adn demand on BOD that they cause corporation to bring suit
—Demand must be rejected or lapse 90 days
Voting: who can vote and when
any owner on record date as determined by BOD, up to 70 days before the meeting date
proxy voting: (i) (ii) (iii) (iv) (v)
-revocability
(i) a writing; (ii) signed by record shareholder; (iii) directed to the corporation’s secretary; (iv) authorize another to vote their shares; (v) valid for 11 months.
-revocable unless proxy says irrevocable and Shareholder passed some interest
Shareholders Meeting
-an annual meeting, 1 Director slot must be elected OR specially noticed special meeting called by BOD, President, or 10% of voting shares re: fundamental corporate change or proposal
-special meeting is limited to stated purpose
Quorum
majority of outstanding shares at meeting’s start
-quorum vote: the votes in favor are more than the votes against
pooled or block voting trust: definition; requirements
formal delegation of voting power to voting trustee which is enforceable for 10 years.
-requires: written trust agreement; filed with the corporation; transfers shares to voting trustee; Shareholder gets the trust certificates; and the Shareholder retains all rights but voting
Shareholder Voting Agreement
-a written agreement to vote shares as required in agreement
-it is binding and enforceable; no time limit or filing
cumulative voting
must be expressly granted in Articles. Only available when voting for Directors
Other Shareholder Rights/Issues:
Shareholder action for involuntary dissolution
ask the court for liquidation if Directors are deadlocked & corporation is threatened with irreparable injury, or oppression, or waste is occurring
record books
demand upon notice/proper time
dividends: declaration and personal liability
-declared solely at BOD discretion, limited only if corporation is insolvent.
-BOD is personally liable for unlawful distributions, unless good faith reliance on financial officer’s report re: solvency
dividends: priority
*preferred share ($ dividend preference) payable at $ amount stated;
-participating preferred: paid as preferred and common share
-cumulative preferred: paid at rate of preferred each year
-common: paid last and equally
dividends: paid out
of earned surplus, not stated capital
repurchased and redemptions: definition; CL; and Modern
decision lies solely with BOD. Shareholders can’t force corporation to repurchase
-Common Law: only from earned surplus/retained earnings
-Modern: not allowed if corporation is insolvent
closely held corporations: definition; requirements; result
-agreement amongst the Shareholders to eliminate corporate formalities
-requirements: unanimous Shareholder agreement in Articles, By-Laws, or filed, written agreement. Must be reasonable share transfer restriction
-result: no piercing. May be S-Corp: P tax treatment if less than 100 Shareholders who are individual, U.S. residents and only one class of stock
processional corporations: definition; requirements
-licensed professionals
-requirements: organizers file with name as a Professional Corporation; Shareholders must be licensed professionals; only practice one designated profession; Pro liable personally for own malpractice, but not for other malpractice or obligations
Duty to other Shareholders
-generally none
-Controlling Shareholders: duty not to unfairly prejudice the minority. If selling to looter, the corporation will be liable for damages unless reasonable measures are taken to investigate the buyer. Liability also for selling shares at premium in exchange for corporate office.
Fundamental Corporate Changes:
-Types
-types: Merger; consolidation; dissolution; Fundamental Amendments to Articles; sale of substantially all corporation assets
steps
BOD resolution; notice of special meeting of Shareholders; approval by majority of all shares entitled to vote and by a majority of any voting group adversely effected; file a notice with State, eg. Art of Merger.
-EXCEPT: no Shareholder approval for short form merger (where the parent corporation owns 90% of the sub)
appraisal rights: definition and requirements
-dissenting Shareholders can force the corporation to buy shares at fair value.
-requirements: before vote, file a written notice of objection and intent to demand payment; vote objecting to the change; prompt written demand to be bought out
-the court will appoint an expert appraiser to value
sale of assets
may be considered de facto merger and trigger recession and appraisal rights. Procedural steps must be followed.
dissolution/liquidation
approval by a majority of Directors and shares entitled to vote
Federal Securities Laws:
-Anti-Fraud (Rule 10(B)(5)): elements
-elements:
-Interstate Commerce / Use of the National Exchange;
-Scienter (intent to decieve);
-Deception (material misrepresentation or misappropriation of material non-public info;
-In connection with actual purchase or sale of securities
insider trading: Tipper; Tippee; misappropriation
Tipper: improper purpose + benefit
Tippee: tipper breach and tipee knew
Misappropriation: government prosecution for trading on market info in breach of duty of trust/confidence owed to the source of the info
section 16(B): short swing trading profits: requirements and effect
-requirements: reporting corporation: listed on the national exchange or more than 500 Shareholders and $10mil in assets.
—Defendant must be Director and Officer or more than 10% Shareholders
—they may not buy then sell stock within a single 6 month period. In 6 months, look at the highest sell and lowest buy price
-effect: profits are recoverable
Sarbanes Oxley
CEO/CFO of reporting corporations must certify that filing doesn’t contain material misrepresentations or ommissions & fairly presents the financial position
-willfully certify a false report: $5mil fine and 20 years
-If false report is restated, the corporation may recover CEO/CFO profits from trading within 12 months after filing + incentive based compensation
-recovery also from trades during “black out” of at least 3 days when 50% of employees are prohibited from trading in retirement plans
