Business Entities Flashcards
Who may incorporate?
One or more natural or artificial persons capable of contracting may form a corporation.
What is the internal affairs doctrine?
Laws of the state of incorporation govern the internal structure/actions of a corporation. Only Louisiana chartered corporations are governed by LA law.
How do you file appication for corporate name?
Application must be filed with the Secretary/State and the name will be reserved for 60 days with TWO 30-days extensions allowed.
What are the requirements for the corporate name?
Corporate name, except in cases of railroad/telegraph/telephone corporations, shall contain the word CORPORATION/INC/LTD, or Company/Co. However (& Co. is not allwed). No business corporation shall include any word in its corporate name that suggests it might be a bank or insurance company/charitable/nonprofit entity. Every business corp must have a name that is DISTINGUISHABLE from every other PREVIOUSLY REGISTERED corproation ot trade name.
What are the requirements for the articles of incorporation?
- Articles shall be written in English; 2. Signed by each incorporator; or 3. By a mandatary of each incorporator. An incorporator can be a mere functionary/need not be anyone important to the corporation.
What are the mandatory statements for the articles of incorporations?
- The name of the corporation; 2. The corporate purpose–cannot simply say that the the purpose is to make money; 3. The aggregate number of shares which the corporation shall have authority to issue/if only one class, the par value of each share; 4. The full name and address of each incorporator.
What happens if the Secretary of State accepts flawed articles of incorporation, e.g., do not include all mandatory articles of incorporation?
No substantive effect on the corporate existence or powers; Sec of State may ask for a correction.
What other clauses must be added to the articles of incorporation in order to be oeprative?
- Preemptive rights; 2. Cumulative voting; 3. Cumulative and/or participating rights for preferred shareholders in dividend distributions; 4. Limiting liability for breach of fiduciary duty; 5. A statement that if any paid out dividences are unclaimed, they revert to the corporation (otherwise,r evert to state). Note: anything LAWFUL may be put in the articles.
How are the articles of incorporation filed?
Filed, with an INITIAL REPORT, with S/State. Certified copy is filed in the mortgage office of the parish in which the registered office of the corporation is located.
What is the initial report?
Unique to LA. Must be signed by EACH incorporator/agent, and must state: 1. Location and municipal street address of the corporation’s registered office; 2. Full name and municipal street address of each registered agent; and 3. Names/municipal street addresses of each of the initial directors if selected by the time the articles are filed.
When does the corporation’s legal existence begin?
Legal existence begins with the issuance of the certificate of incorporation by Sec/State, but it is effective RETROACTIVELY to the date the articles were filed.
When must a corporation file an annual report?
A corporation is required to file an annual report EVERY year with Sec/State on or before the anniversary date of incorporation. Must be signed by an officer/any two directors, and it UPDATES the initial report.
What are the consequences of failing to file the annual report?
- Sec/state can demand that the report be filed; 2. If the report is not filed within 15 days, the Atty Gen an institute a civil action and collect $50 fee for every fifteen days that goes by that the corporation fails to file the report. 3. If the corporation fails to file an annual report for three consecutive years the Sec/State shall give notice of intention to revoke the articles and franchise–corp and thirty days to cure the defect.
What are the various menthods to accomplish filings?
Filings related to ANY type of business entity (partnerships/LLC/corps/LLPs) may be by: 1. HARD COPY in person at Sec/State’s office; 2. Electrontically on state internet website; 3. Fax to Sec/state; 4. PDF emailed to Sec/state. Note: documents must be signed by those authorized, i.e., incorporators. Electronic filings must have either an electronic/digital signature.
When does a filing NOT need the signature witnessed by a notary public?
Dispened with if the document is filed: 1. Electronically, or, 2. In person, if the ard copy is signed by person authority/verified in presence of employee of SecState.
What is the function of bylaws? What is the primary distinction between bylaws and articles of incorporation?
- Regulate more mundane internal affairs of the corporation; 2. Board may adopt/amend the bylaws without shareholder approval unless the articles say otherwise–subject to the power of the shareholders to change or repeal any by-laws. 3. Bylaws are INVALID if inconsistent with any terms in the articles. 4. Primary distinction between bylaws and articles is that articles may ONLY be amended by shareholder vote.
What general rule governs the issuing of shares? What about the issuance of first shares?
- All shares issued by a corporation MUST be authorized in the articles–may authorize shares of different classes, each with stated designations/voting powers/preferences/divided or redemption rights/other relative rights or restrictions/limitations/qualifications. 2. First shares may be issued to the corporation promoters at the time a corporation is first formed, or, they may be issued AFTER incorporation by the board of directors.
What are permitted types of consideration for shares?
- Cash; 2. Any kind of property; 3. Services already rendered to the corporation–however, pre-incorporation services, such as an attorney drafting the articles of incorporation–are not valid consideration; 4. Unexecuted promises/promises to perform services/transfer property, even if secured or through NI, are NOT valid consideration. (can get through 3&4 by giving person cash to buy stock).
What is the result of issuing stock for invalid consideration?
Stock issued for invalid consideration is VOID and must be cancelled by the corporation (which can then reissue the stock for valid consideration).
What is the required AMOUNT of consideration for stock?
- Par value stock–(cannot be sold for less than par, but it may be sold for any amount greater than par that the Board sets); 2. No-par stock–can be sold at a price set by the Board (provided it is a FMP); 3. If stock is sold for property, the Board’s determination of the value of the property is upheld if it was made in good faith without a confict of interest.
What is dilution?
If the board sells stock at different prices, DILUTION will occur. If the Board does so WITHOUT a valid reason, the directors will be liable to the shareholder whose stock was diluted.
What is appropriate consideration for treasury stock?
Stock once sold and then REPURCHASED by the corporation, par/no par, may be sold for any type of consideration determined by board of directors, subject only to the fiduciary duty to the corporation. Limitations in ISSUING never before issued stock DO NOT apply to treasury stock.
What are the stock certificate requirements?
All shares MUST be represented by certificates of stock UNLESS the corporation is a participant in the Direct Registration System/Depositary Trust & Clearing Corporation.
What information must be on the stock certificate?
- Name of issuing corp; 2. Name of person who owns shares; 3. Number/class/series of shares; 4. Rights/prefs/limiations on class/series of shares, if the corporation has different classes/and or series of shares.
What is the effect of not providing stock certificates?
If the corporation does not provide stock certificates, the corporation will provide within a reasonable period of time, written summary of all info required to be on the face of the stock certificate.
What are the duties of promoters?
Promoters have a fiduciary duty of DISCLOSURE and FAIR DEALING to the corporation to disclose fully to an ind board of directors or to all existing and contemplated shareholers any self-interest in ANY dealings between the promoter and corporation, including all MATERIAL facts that might affect a corporate decision to deal with the promoter.
What is the corporation’s remedy for breach of promoters’ fidcuiary duty? What are the creditors’ rights for breach of promoters’ fiduciary duties? What is the innocent shareholders’ remedy for breach of promoters’ fiduciary duty?
- Corporation remedy for breach of fidcuiary duty by the promoter is a suit for recission of any contract/or for damages. 2. Creditors MAY be albe to sue IN THE PLACE of a corporation that has become insolvent after fraud/breach of fidcuiary duty by a promoter; 3. Innocent shareholders may be able to sue on behald of the corporation in a DERIVATIVE suit, or they may have remedies under federal/state securities laws.
When will a promoter be liable on a pre-incorporation contract?
Unless the contract CLEARLY says otherwise, promoters are personally liabe for pre-incorporation contracts (ie with third parties), if the promoter knew the corporation had NOT YET come into existence.
When will the corporation be liable on a pre-incorporation contract?
The corporation will be liable on such a contract if it has ratified/adopted it after coming into existence, either explicitly OR implicitly. Promoter ALSO remains personally liable, however, even after the corporation adopts the contract, UNLESS the other party discharges him.
Who is liable for contracts on behalf of a corporation believed to exist?
If a promoter enters into a contract on behalf of a NOT YET FORMED corporation, ERRONEOUSLY believing that it HAD come into existence, he wil NOT be personally liable if: 1. Made good faith effort to incorporate (de facto corporation); 2. Other party had relied only on the corporation’s name and assets (corporation by estoppel doctrine)
Can shareholders be liable for the debts of the corporation?
Shareholders are only liable for the debts of the corporation up to the LIMIT of their investment. DISREGARD of the corporate entity to impose personal liability on the shareholders is called piercing the corporate veil.
What are the grounds for veil piercing?
- Buienss has not been conducted in PROPER CORPORATE FORM; 2. Assets of the corporation have been treated as the shareholder’s own or COMINGLED with his personal assets; 3. Corporation is UNDERCAPITALIZED; 4. Corporation is THINLY capitalized.
Can the Board be compelled to pay dividends?
The payment of dividends is solely within DISCRETION of the Board. Must be a BONA FIDE BUSINESS reason for not paying dividends–but this will almost always be found under the BUSINESS JUDGMENT RULE, which required bard decisions to be upheld if there is any reasonable corporate justification for those decisions.
What are the limitations on dividend payments to shareholders?
Dividends are paid to shareholder of RECORD as of a specified record date. Limitations on how much of corporation’s assets may be paid to shareholders in dividends.
What are the two alternative methods for calculating the limits of paying dividends?
- Dividends may be PAID out of SURPLUS–first the earned surplus, then the capital surplus (if capital surplus used, notice to shareholders is required). Dividends MAY NOT be paid out of surplus if the corporation is insolvent/would be made insolvent. 2. NO SURPLUS, NET PROFITS–if there is no surplus available, the corporation may pay dividends out of its NET PROFITS for the then current/or preceding fiscal year/or both. Method is available only to the extent that assets are greaters than liabiliies plus liquidation preference of all outstanding preferred shares.
Who will be liable for an unlawful dividend?
Directors VOTING IN FAVOR of an unlawful dividend WILL BE LIABLE to the corporation, and/or its creditors, when it is paid. Directors are JOINTLY LIABLE–full amount may be recovered from one director. Shareholders will ALSO be liable for any illegal dividends received–NO defense that shareholder received the dividend without knowledge of its illegality. Note: director can sue SH for indemnification within two years.
Can a cash dividend be cancelled once it is declared?
Yes, a cash dividend once declared may be cancelled ONLY FOR CAUSE; a stock dividend once declared may be cancelled for ANY REASON.
What is redemption?
Redemption is when the corporation exercises a UNILATERAL right stated in the stock certificate to buy back its shared from shareholders. SH may not refuse sale if corporation has the right of redemption.
What is repurchase?
When a corporation and one or more shareholders MUTUALLY negotiate a purchase by the corporation of its stock owned by the shareholder.
What are the limitations on redemption or repurchase of shares?
A corporation may NEVER repurchase or redeem its shares when it is insolvent/when such purchase or redemption would render it insolvent. In other words, stock repurchase may only be funded out of earned surplus account (can’t look to profits).
What is director liability for voting in favor of a stock redemption or repurchase?
Directors voting in FAVOR will be LIABLE to the corporation and/or to its creditors, if paid for with funds NOT legally available. There is an exception if directors relied on statements prepared by qualified accountants or corporate records. Note: BEFORE directors are liable to creditors, the creditors MUST get a judgment against the corporation and FAIL to satisfy it.
What is the distinction between cumulative and noncumulative dividend guarantees?
- Cumulative–if FULL guaranteed dividend amount on a preferred share is not paid, does the UNPAID amount carry over and get added to the guarantee for the next year? 2. In LA, if the ARTICLES and the STOCK CERTIFICATES are silent, preferred dividend guarantees are noncumulative. If you want cumulative dividends, you need to state expressly in the articles.
Can preferred shareholders participate in residual dividends?
After the preferred shares receive their guaranteed amount, there is often a question whether the preferred shares are also entitled to receive a pro rata share of the residual distributions–participating/non-participating. 2. In LA, if the ARTICLES and the STOCK CERTIFICATES are SILENT, preferred shares are NONPARTICIPATING in dividends and liquidations. If you want participating preferred shares, need to state that in article. (Appears inconsistent with 51(c), but based on older case law.
What is a corporation’s purpose? Where must it be stated? Can it be held liable for exceeding its powers as stated in the articles?
A corporation’s purpose must be stated in the articles and may be as broad or narrow as it wishes. If the corporation EXCEEDS it powers as stated in the articles, ACTS ULTRA VIRES, it will be liable on a contract or for a tort.
When may the ultra vires doctrine be raised?
May only be raised in a suit by or against a corporation: 1. For an injunction before the corporation commits the act; 2. For damages by the corporation against the offending directors or officers; or 3. By the state in a suit to dissolve the corporation.
When will an agent have the power to bind the corporation?
- ACTUAL AUTHORITY–either express or implied; 2. APPARENT AUTHORITY–corporation is bound, but has a right to recover any damages it suffers against person who acted in excess of her authority; 3. RATIFICATION–when a person without actual authority acts, the corporation is bound if it subsequently ratifies the act expressly/accepts benefit of transaction.
What are the size limits on the baord of directors?
The size of the board should be FIXED in the ARTICLES or BYLAWS. If not set therein, the size shall be names in initial/supplemental report. As of 1998, only ONE director is REQUIRED.
What is the role of the board of directors?
- All corporate powers shall be vested in, and the business affairs of the corporation shall be managed by, the Board of Directors. 2. The shareholders own but do not run the corporation. 3. NO individual director/shareholder has any mandatary/agency authority in her capacity as a director to act for/or bind the corporation with third parties.
What are the qualifications for a board of directors? What is their length of term?
May be stated in ARTICLES or BYLAWS, otherwise, any COMPETENT person may be a director. Don’t need to be a shareholder unless the bylaws require it. Each director’s term is ONE YEAR, unless the articles or by-laws EXTEND the term up to a MAXIMUM OF FIVE YEARS. (if greater, should be staggered, but not a requirement)
When does the office of a director become vacant? When can the seat be DECLARED vacant?
- The office of a director shall become vacant if she dies or resigns; 2. A board may DECLARE vacant the office of a director if: she is bankrupt; she is interdicted; she is too sick for six months or longer; she ceases to have qualifications required by the articles or by-laws.
When may a shareholder dismiss a director or directors?
May be dismissed WITH OR WITHOUT CAUSE by vote of a majority of the TOTAL VOTING POWER at any special meeting called for the purpose. In other words, the required vote is a majority of all shares outstanding whether or not repped at the meeting/actually voted. Notes: need to be at a special meeting specifically called for that purpose; directors elected by a SPECIAL class of stock can only be removed by a majority of the shares of THAT class.
Is a director entitled to notice before being removed for cause?
LA law is unclear, but general rule is that if the articles require CAUSE to remove a director, some reasonable notice and opportunity must be given.
What are the two ways to fill board vacancies?
- A board vacancy can be filled for the remainder of the vacant term by a MAJORITY vote of the remaining directors, EVEN IF they do not constitute a quorum; 2. A vacant director’s seat may be filled by a majority vote of the shareholders at a special meeting, INCLUDING the meeting at which a director was removed.
When may the board of directors act?
The Board may only act at a REGULAR or SPECIAL meeting called with adequate notice toe ach director. To vote, a director myst be PRESENT at the meeting, and MAY NOT VOTE by PROXY unless, (and only if the articles so provide), the proxy I sheld by another director or a shareholder. EXCEPTION: May also take action by UNANIMOUS WRITTEN CONSENT of all the directors or committee members.
