Business Entities Flashcards
Who are incorporators and what are their duties?
One or more natural persons, or an entity such as a corporation, partnership, or association, may act as an incorporator. No further qualifications, such as age, residency, or citizenship, are required.
The incorporator(s) submit articles of incorporation to the Department of State. Corporate existence begins when the Department of State files the articles. The incorporators also hold the organizational meeting where the directors are elected. Then, either the incorporators or the new directors will elect officers and adopt bylaws.
What are mandatory inclusions for the articles of incorporation? What cannot be included?
The articles of incorporation must include:
- (1) the name and address of the corporation, which must indicate its corporate status with “Co.” or the like,
- (2) the name and address of each incorporator,
- (3) the address of the registered office and the name of the registered agent, and
- (4) the number of authorized shares, including any class attributes of shares.
The articles may not contain provisions imposing liability on a shareholder for attorneys’ fees or expenses related to a corporate claim (such as a derivative action). It is not necessary to set forth in the articles any of the corporate powers enumerated in the statute.
Optional provisions include the number of directors, the par value of stock, provisions granting preemptive rights to shareholders, and any other provision not inconsistent with law.
What are the default rules of corporate powers?
Several default rules apply to corporations. This means that provisions on these points need to be included in the articles only if the corporation wants a different rule to apply. The default rules include:
- A corporation has perpetual duration.
- A corporation has the same powers as an individual to act and so may sue, be sued, enter contracts, hold property, mortgage property, lend money, make donations, and so on.
- A corporation may act to achieve any lawful purpose.
What is an ultra vires act and when are they valid?
An ultra vires act is outside the scope of the any stated corporate purpose. Ultra vires acts are valid, but:
- Shareholders or the state can seek an injunction prohibiting the corporation from engaging in the ultra vires act, and
- Officers/directors are personally liable in a direct or derivative action by the corporation for any ultra vires acts they cause
Note: The Florida statute no longer uses the term “ultra vires,” but the concept of “beyond the corporation’s purposes or powers” has not changed.
What is a de jure corporation?
The incorporators deliver the articles to the department of state, which files them if all legal requirements are met. Corporate existence begins upon filing. Filing is conclusive proof a corporation was duly formed in accordance with the law (that’s what “de jure” means).
What must be included in an annual report and what is the penalty for failing to submit one?
Corporations qualified to do business in Florida must file an annual report with the department of state disclosing:
- (1) the corporation’s name and the state or county of incorporation,
- (2) the date of incorporation, or the date admitted to do business in Florida if a foreign corporation,
- (3) the address of its principal office and the mailing address of the corporation,
- (4) its federal employer identification number,
- (5) the names and business street addresses of its principal officers and directors, and
- (6) the street address of its registered office and name of its registered agent.
A corporation not complying with this requirement may not bring an action in Florida courts until the report is filed, and the corporation risks administrative dissolution (meaning, the corporation may be involuntarily dissolved). Corporations may be required to provide certain other information to the state upon request.
What is a de facto corporation?
A de facto corporation may be found to exist even if there is a substantial defect in formation, provided there has been a good faith effort to incorporate, colorable compliance with the law, and actual use of corporate status (meaning, an act on the corporation’s behalf).
Note, however, that the de facto corporation doctrine is not available if the defendant knew of the lack of incorporation. Florida expressly provides that all persons purporting to act as or on behalf of a corporation, knowing that there was no incorporation, are jointly and severally liable for all liabilities created while so acting. However, there is no personal liability to a third party who also had knowledge that there was no valid incorporation.
What is a corporation by estoppel? What are the limitations on its protection to shareholders?
Corporation by estoppel is an equitable doctrine that may be applied when persons have dealt with a defectively formed corporation as if it were a legal corporation. These persons may be estopped from later arguing that the business is not a corporation (meaning, estopped from avoiding contracts or attempting to hold shareholders personally liable on grounds of defective corporate status).
Corporation by estoppel protects shareholders only against contract claims, not tort claims, since contract creditors could have protected themselves in advance (for example, by getting a personal guarantee from the shareholders). Tort victims generally have no such opportunity.
What is a promoter and what is their liability? How does their liability differ from that of the corporation?
A promoter undertakes to form a corporation and to procure the necessary capital and other items. Persons such as attorneys acting in a professional advisory capacity are not considered promoters. An incorporator is one who signs the articles of incorporation, and may or may not be a promoter.
The promoter is liable on a preincorporation contract unless there’s a novation (where the corporation, promoter, and the third party agree to substitute the corporation for the promoter as the one liable on the contract). In contrast, the corporation is not liable on a contract made by a promoter unless the corporation expressly or impliedly adopts it. Even after adoption, the promoter remains liable unless there is a novation.
Promoters owe fiduciary duties to the corporation and may be liable to the corporation for profiting on a sale of property to the corporation.
What is a foreign corporation? When may they transact business in Florida? What are the penalties for doing so without authority?
A corporation organized under the laws of any jurisdiction other than Florida (for example, a Georgia corporation) is a foreign corporation. A foreign corporation transacting business in Florida must qualify to do business here (note that a foreign corporation that is not transacting business in Florida does not have to qualify). Note this applies to transacting business in Florida on a regular basis, not a single transaction.
To qualify, a corporation must get a certificate of authority from the Department of State. To do so, the corporation must provide information from its articles and be in good standing in its home state. Foreign corporations must maintain a registered office in the state, appoint a registered agent, and file an annual report.
Foreign corporations that transact business in Florida without qualifying are not permitted to sue in Florida courts, but may be sued in Florida courts. The state may also impose annual fees for failing to qualify.
Who can be a director and how many directors must a corporation have? How are they elected?
A corporation may have one or more directors, as fixed by the articles or bylaws. Directors must be natural persons, 18 years of age or older.
Shareholders elect directors at the annual meeting. A corporation may dispense with or limit the authority of a board of directors.
Directors are elected by plurality vote unless provided otherwise in the articles of incorporation.
How can directors be removed? What is done about vacancies on the board of directors?
Unless otherwise provided, directors may be removed by the shareholders at any time with or without cause (unless the articles say that directors can be removed only for cause). Directors elected by a certain class of stock may be removed only by vote of that class. A director may be removed if the number of votes cast to remove the director exceed the number of votes cast not to remove the director, except to the extent the articles or bylaws require a greater number. If the corporation has cumulative voting, a director may not be removed if the votes cast against her removal would be sufficient to elect her at an election of the full board.
Any vacancy on the board is filled by the remaining directors or shareholders, unless the articles provide otherwise, until the next annual election. An increase in the number of directors is deemed to create vacancies for this purpose.
What are the rules for board of directors meetings (notice, quorum, voting)?
Directors must meet and act as a board unless all directors consent to an action in writing. Meetings can be by phone.
Notice is only required for special meetings, at least two days in advance and need not specify the purpose of the meeting. Actions taken at a meeting without proper notice are deemed unauthorized.
A quorum consists of a majority of all directors on the board, unless a different number is specified by the articles (but in no situation can it be lowered below one-third). A quorum can be lost if enough directors leave a meeting.
To approve an action, a majority of directors present must assent, unless the articles say otherwise. Voting by proxy is prohibited for directors.
What are the management powers of directors? Can they be delegated?
Directors have powers as necessary to manage the business of the corporation, including the power to set corporate policy, to supervise officers, to elect and remove officers, to declare dividends, and to initiate fundamental changes for submission to shareholders for approval. Directors have a right to inspect corporate records, to reasonably rely on information provided by management and experts, to be reimbursed for expenses, and generally to be indemnified in defending their actions taken in good faith. Directors’ compensation is only as the bylaws provide.
Directors can delegate their powers, for example to a committee. However, a committee cannot amend bylaws, fill vacancies on the board or a board committee, or authorize the reacquisition of shares except within limits set by the board.
What is the fiduciary duty of care for corporate directors?
A director must generally exercise the care and skill an ordinarily prudent person in a like position would reasonably believe appropriate in like circumstances. The standard is objective, and does not make exceptions for figurehead directors or for an individual’s actual level of skill. When a court is called upon to consider the wisdom of directors’ decisions, it will apply the business judgment rule and will not second-guess rational, informed, good-faith decisions over which reasonable persons could have differed. At common law, directors could be held personally liable to the corporation for breaches of the duty of care, but Florida has statutorily abolished most such liability.
Breach of the duty can be either by nonfeasance (doing nothing) or misfeasance (doing something wrong).
What is the fiduciary duty of loyalty for corporate directors?
A director must act in good faith and with a reasonable belief that what they do is in the corporation’s best interest. The duty of loyalty comes into play whenever a director has a personal stake in an action to be taken by the board. Directors also may not compete with the corporation.
What is required for an interested director transaction?
An interested director transaction occurs when a director is on both sides of a transaction. The good faith aspect of loyalty requires that the director make full and fair disclosure of their conflict of interest to the other members of the board, prove fairness, and receive approval of a majority of uninterested directors for the transaction. Alternatively, the disclosure can be made to the shareholders and can be approved by a majority of uninterested shares.
What is the corporate opportunity doctrine?
Under the corporate opportunity doctrine, directors and officers must inform the corporation of business opportunities of which it might wish to take advantage. A director cannot usurp an opportunity the corporation might be interested in without full disclosure and board approval. If a director fails to get informed board approval and personally takes advantage of the opportunity, she may be compelled to transfer the benefits to the corporation. In Florida, director liability to the corporation for breaches of the duty of loyalty has been statutorily limited, but not abolished.
What are the limits on individual director liability for breaches of fiduciary duties committed by the board? What is required for a director to be liable for damages?
A dissenting director is not liable if their vote is recorded in the minutes. Absent directors are also not liable for breaches committed during a meeting. Directors may also rely in good faith on the opinion of competent officers, employees, or professionals. They may also rely on financial statements provided by accountants.
Directors are not liable for damages for breaching the duty of care or loyalty unless they also violated criminal law; received an improper personal benefit; authorized an unlawful dividend; or engaged in reckless, willful, or intentional misconduct. This immunity is effective even against third parties.
What are corporate officers? What are their rights and liabilities?
Officers are agents of the corporation and have fiduciary duties, rights, and liabilities similar to those of directors. Officers are elected or appointed by the board of directors. The same individual may simultaneously hold more than one office in a corporation. The board has the power to remove officers even if it would breach the corporation’s contract with the officer (but then may be liable for breach of contract).
The law of agency applies to give the officer or agent the power to bind the corporation in dealings with third parties. Authority may be actual or apparent. The president (chief executive officer) has implied authority to do acts in the ordinary course of business.
No particular officers are required, but it must have the officers provided for in the articles.
When is indemnification of directors and officers prohibited, mandatory, and permissive?
A corporation is prohibited from indemnifying a director or officer if the director or officer was held liable to the corporation, received an improper personal benefit, or violated criminal law.
If a director or officer is wholly successful in defending a suit brought against them, the corporation must indemnify. Success can be either procedural or on the merits.
Permissive indemnification covers all other expenses incurred by a director or officer that are neither prohibited nor mandatory. Determination is made by disinterested (“qualified”) directors or shareholders, and the director must show that they acted in good faith and that they reasonably believed they were acting in the company’s best interests.
The court has the power to indemnify notwithstanding these rules.
What powers do shareholders have in management?
Shareholders normally do not have power to control the day-to-day management of a corporation, but may be given management powers by the articles. Shareholders exercise indirect management by electing directors, amending articles or bylaws, or approving fundamental corporate changes. Shareholders can also be given management powers by unanimous shareholder agreement if the corporation’s shares are not publicly traded.
What is piercing the corporate veil and what situations justify it?
Generally, shareholders have limited liability, which means they are not personally liable for the debts of the corporation. However, a court may “pierce the corporate veil,” in certain situations:
- The “alter ego” doctrine, where the shareholder has used the corporation as a conduit for their personal affairs. Florida requires a showing of fraud or illegality. Typical situations include intermingling of corporate and personal funds or paying personal debts with corporate funds.
- Shareholders may be held personally liable when a corporation is grossly undercapitalized at its outset.
- Under the “deep rock” doctrine, in bankruptcy proceedings, capital contributions that are denominated as “loans” by shareholders of close corporations may be subordinated to debts owed to outsiders.
What is a shareholder derivative suit and what is required to file one?
A derivative suit is one brought by a shareholder to enforce a corporate cause of action when the board of directors for some reason has not sought to enforce the corporation’s rights.
Recovery in a derivative suit goes to the corporation. However, the court may order a corporation to reimburse a successful shareholder/plaintiff for attorneys’ fees and expenses.
To be eligible to bring a suit, the shareholder must have owned stock in the corporation when the claim arose or acquired it by operation of law (for example, by inheritance or divorce, but not by gift or purchase) from someone who did. The shareholder must also be a shareholder at the time the suit is commenced.
The shareholder must first file a demand on the board of directors and wait 90 days until bringing the suit unless the shareholder is notified sooner that the demand is rejected or if the delay will cause irreparable injury.
What is the record date?
Eligibility of a shareholder to vote is determined by stock ownership as of the record date, which may not be more than 70 days before the meeting. If no record date is set, it is the close of business the day before the first notice of meeting is delivered to shareholders. In the case of the record owner’s death, the record owner’s executor may vote the shares.
What are the rules for shareholder proxies? For how long is a proxy agreement valid? Are they revocable?
Every shareholder entitled to vote, or express consent or dissent, may authorize another person to act for them by written proxy. A shareholder (or the shareholder’s properly appointed agent) may appoint a proxy by sending the corporation’s secretary a signed, written authorization. A proxy appointment is valid for the term provided in the appointment. If no term is provided, proxies expire after 11 months unless the appointment is irrevocable.
Proxies are revocable at the pleasure of the shareholder unless the proxy provides it is irrevocable and the proxy holder has an interest in the shares, such as a pledgee, purchaser, or employee. A proxy may be revoked, even if otherwise irrevocable, by a bona fide purchaser of the shares without notice of the proxy.
What is a voting trust?
Shareholders may establish a voting trust to irrevocably confer upon a trustee the right to vote their shares. For a voting trust, you need a written trust document and transfer of legal title to trustee. The trust agreement must be deposited with the corporation and is subject to inspection by any shareholder. Trust certificates representing shares are freely transferable, but the transferee is bound by the agreement.
What is a voting agreement?
In a voting agreement, shareholders agree to vote their shares a certain way. The agreement must be in writing and signed. Transferees of the shares are bound if the existence of the agreement is noted on the share certificate or they otherwise have notice of it. Specific performance may be available to enforce the agreement.
When can shareholders take action without a meeting?
Shareholders can take action without a meeting if there are written consents from the minimum number of shares (not shareholders) needed to take action at a meeting where all shares entitled to vote on the action are present and voting.
What are the requirements for shareholder meetings? Is notice required?
An annual meeting must be held for the election of directors and other business. If an annual meeting is not held within any 15-month period, any shareholder may apply to the court for an order requiring the meeting. Special meetings may be called at any time for any appropriate purpose by the board of directors, the holders of at least one-tenth of all outstanding voting shares, or other such persons as authorized in the articles or bylaws.
Shareholders must be notified in writing of meetings at least 10 days (but no more than 60 days) in advance of the meeting date. The notice must specify the location and time of the meeting. For special meetings, the notice must also state the purpose. The corporation must also compile a complete list of shareholders entitled to vote at the meeting, and must keep that list open for shareholder inspection.
Without proper notice, a meeting is void unless the defect is waived either expressly (in a signed writing) or impliedly (the shareholder attends the meeting in person or by proxy without objecting to the meeting being held).
What are the voting and quorum rules for shareholder meetings?
A quorum consisting of a majority of the outstanding shares entitled to be voted must be represented at a meeting for the meeting to be valid. Whether a quorum is present is determined at the start of the meeting, not each time a vote is taken. Therefore, in contrast to directors, a shareholder’s departure after the meeting starts cannot break a quorum and prevent a vote. The quorum can be moved up or down in the articles, but it can never be less than one-third of the shares entitled to vote.
A matter is approved if the votes cast for it exceed the votes cast against it, unless the articles require a greater number of affirmative votes.
Directors are elected by plurality unless provided otherwise by the articles.
What is cumulative voting?
The articles may provide for cumulative voting. Cumulative voting means that each shareholder is entitled to a number of votes equal to the number of his voting shares multiplied by the number of directors to be elected and may cast his votes for any one candidate or divide them among any number of candidates. Cumulative voting applies only to the election of directors.
Whether a shareholder has enough voting strength to elect one or more directors depends not only of the number of shares the holder owns, but also on the number of directors being elected at the meeting (D) and the total number of shares voting at the meeting (S). To ensure the election of the number of directors desired (N), a shareholder must have a number of shares greater than the result of [(N x S) / (D + 1)].
What rights do shareholders have to inspect corporate books and records? What is required in a demand?
The shareholders may inspect the minutes of any meeting of the board, or records of any actions taken without a meeting by the board or any board committees, financial statements and accounting records of the corporation, the record of shareholders, and any other books and records if:
- (1) the demand is made in good faith and for a proper purpose;
- (2) the shareholder describes with reasonable particularity their purpose and the records they desire to inspect; and
- (3) the records are directly connected to their purpose.
Which shareholder inspection rights are absolute?
Every shareholder has an absolute right (meaning, no proper purpose is required) to inspect, during regular business hours at the corporation’s principal office, such items as
- (1) the articles, bylaws, minutes of all meetings of, and records of all actions taken without a meeting by, its shareholders,
- (2) all written communications within the past three years to shareholders,
- (3) lists of the names and business addresses of the current directors and officers, and
- (4) the most recent annual report.
On five days’ written notice, a shareholder of a Florida corporation (or a foreign corporation authorized to transact business in Florida) who resides in Florida is entitled to inspect the bylaws and/or a list of the names and business addresses of the current directors and officers at a reasonable location in Florida specified by the corporation.
When can directors deny a shareholder’s demand to inspect corporate books and records?
In any case, written demand must be made at least five business days before the day on which the share holder wishes to inspect. The corporation may refuse the request if the share holder:
- (a) has within the past two years offered for sale a list of shareholders of any corporation or aided and abetted another in so doing;
- (b) has improperly used any information secured through any prior examination of the books of any corporation;
- (c) is not acting in good faith; or
- (d) does not have a proper purpose.
A purpose will generally be deemed proper if inspection is sought for the purpose of determining the value of their stock or the availability of a proper fund for the payment of dividends.
When may dividends be declared? Can shareholders compel directors to declare them? What tests must be satisfied to protect creditors against excessive dividends?
In general, shareholders cannot compel directors to declare dividends. Absent bad faith, directors are given wide discretion in this area. A court won’t compel a dividend absent an abuse of discretion. However, once declared, a dividend may not be revoked, except when payment would be illegal. Declaration of a dividend creates an enforceable debt owed to the shareholders.
A corporation may make a distribution only if it can satisfy two tests designed to protect creditors against excessive distributions to shareholders:
- A distribution is permissible only if, after giving it effect, the corporation will be able to pay its debts as they become due in the usual course of business.
- Distributions are limited to the amount by which total assets exceed the sum of total liabilities and the dissolution preferences of preferred shares, unless the articles permit otherwise.
Which shareholders get dividends once they are declared? What is the order of payment? What are cumulative shareholders?
Preferred shareholders are paid first. They do not share in distributions beyond their agreed preference unless they are participating shares, which means they receive a second payment equal to what the common shareholders are paid.
Cumulative means “carry forward.” Preferred shareholders generally have no right to a dividend in any particular year unless a dividend is declared. If a dividend is not declared in a particular year, the preference is lost unless the preferred shares state that they are cumulative. In that case, if dividends are not declared in a particular year, the preference is carried forward.
What liability is imposed on directors and shareholders for improper distribution of dividends?
Directors who willfully or negligently vote to declare dividends are liable to the corporation for the amount paid improperly. However, directors may avoid liability by dissenting on record.
Florida’s director immunity statute does not insulate directors from this liability. However, remember that directors have the defense of good faith reliance.
Shareholders are liable to the corporation and corporate creditors (or the corporation’s trustee in bankruptcy) for the amount of dividends received whether or not they knew the corporation was insolvent. Liability for contribution to a director may exist if the shareholder received the dividend knowing that it was improper.
What is the definition of a partnership? Who is considered a partner?
A partnership is an association of two or more persons to carry on as co-owners a business for profit, whether they intend to form a partnership or not. Courts focus on the intent to carry on as co-owners, not the intent to form a partnership specifically. No formal agreement is required and writings generally are not required, subject to the Statute of Frauds.
To determine who is a partner, consider the following:
- Capital contribution is not required
- The right to control may be enough, even if not exercised
- Sharing profits creates a presumption of partnership; a person entitled to receive profits is presumed to be a partner (unless the payment is for rent, wages, interest, etc.).
To be a partner, a person must be legally capable of entering into a binding contract. Therefore, minors cannot form partnerships.
