Business Structures Pt. 2 Flashcards
Corporation Pt. 1
a corporation has a perpetual life; the shareholders are free to transfer all of their ownership rights to others; it is taxed separately from its owners (taxed on dividends)
some corporations can elect S corporation status which permits it to be taxed like a partnership; some restrictions on an S corp are: stock can be held by no more than 100 people, shareholders must be individuals/estates/trusts, it must be a domestic corporation, there can be only one class of stock, and foreign shareholders are prohibited
promoters enter into contracts before the corporation is formed; promoters are personally bound on the contracts they make until the corporation adopts the contracts after the corporation is formed (either expressly or by accepting the benefits of the contracts); however, even if the corporation adopts a promoter’s contract, the promoter remains liable unless there is a novation (an agreement that the third party will release the promoter and substitute the corporation)
Corporation Pt. 2
items that must be included in the articles of incorporation are: name of the corporation, name and address of the corporation’s registered agent (person who process may be serviced if the corporation is sued), names and addresses of each of the incorporators, and the number of shares authorized to be issued (one or more classes of shares must have unlimited voting rights)
a corporation may include a clause in its articles stating the business purpose for which the corporation was formed; if a corporation has a narrow purpose clause and undertakes business outside the clause, it is said to be acting “ultra vires” and a director or officer who authorizes an ultra vires act may be liable to the corporation for damages caused by the act
in addition to the articles of incorporation, a corporation generally will have bylaws containing rules for running the corporation; they are adopted by the incorporators or the board of directors and may be repealed or modified by the board; they are not part of the articles of incorporation and are not required to be filed with the state
courts generally will pierce the corporate veil when: shareholders commingle personal funds with corporate funds or use corporate assets for personal use, the corporation was inadequately capitalized at the time of formation, or the corporation was formed to commit fraud on existing creditors
Corporation Pt. 3
shareholders have the right to vote to elect or remove directors; they also have the right to vote on whether to approve fundamental changes to the corporation such as dissolution; unless the articles of incorporation say otherwise, each share of stock is entitled to one vote; the articles can give shareholders the right to cumulative voting with respect to electing directors; here each share is entitled to one vote for each director position that is being filled, and the shareholder may cast the votes in any way, including casting all for the same candidate; this helps minority shareholders gain representation on the board
shareholders do not have a right to a distribution until it is declared by the board; once the board declares the distribution, the shareholders are treated as unsecured creditors of the corporation to the extent of the dividend; distributions decrease the corporation’s shareholders’ equity (a stock dividend is not a distribution of corporate assets)
upon five days’ written notice stating a proper purpose, a shareholder may inspect and copy the corporation’s records; the shareholder may send an attorney, accountant, or other agent to inspect
Corporation Pt. 4
when a corporation proposes to issue additional shares of stock, the current shareholders often want to purchase shares in order to maintain their proportional voting strength and the law that grants this to shareholders is known as the “preemptive right;” however, preemptive rights don’t exist unless the articles of incorporation provide for them
when a corporation has a legal cause of action against someone but refuses to bring the action, the shareholders may have a right to bring a shareholder derivative action to enforce the corporation’s rights; such an action may be brought against directors of the corporation or outsiders; derivative actions may be brought only to vindicate wrongs against the corporation
directors can elect, remove, and supervise officers (removal can be with or without cause); a director can recover from a shareholder who received a contribution knowing that it was unlawful; directors are fiduciaries of the corporation and must act in the best interests of the corporation, but directors aren’t insurers of the corporation’s success; a director will not be liable to the corporation for acts performed or decisions made in good faith (known as the business judgment rule); directors are only liable for negligent acts or omissions
Corporation Pt. 5
a director is entitled to rely on info if prepared by corporate officers, employees, or a committee of the board; an action in which a director has a conflict of interest will be upheld only if after full disclosure, the transaction is approved by a disinterested majority of the board of directors or the shareholders, or the transaction was fair and reasonable to the corporation; the board has the power to set director compensation
officers are individual agents (and employees) of the corporation who ordinarily conduct its day-to-day operations and may bind the corporation to contracts made on its behalf; officers are selected by the directors and may be removed by the directors with or without cause; they are not elected by the shareholders; officers may also service as directors of the corporation; an officer is not required to be, but can be, a shareholder of the corporation
decisions regarding issues that might fundamentally change the nature of the corporation require shareholder approval through a special procedure; such fundamental corporate changes include: (DAMS) dissolution, amendments to the articles of incorporation that materially and adversely affect the shareholders’ rights, mergers/consolidations/compulsory share exchanges, and sale of substantially all of the corporation’s assets outside the regular course of business
in regard to fundamental corporate changes, the board must approve a resolution but there is no requirement of unanimity, and the shareholders must be given notice and an opportunity to vote on the change; approval requires a majority of the votes case
Corporation Pt. 6
shareholders who have a right to vote on a fundamental corporate change typically have a right to dissent/appraisal right (the right to have the corporation purchase their shares at a fair price) if the shareholder votes against the fundamental change and it is nevertheless approved
a merger involves one or more corporations joining with another corporation; a consolidation involves one or more corporations joining together to form a new corporation; a share exchange is a transaction in which one corporation acquires all of the outstanding shares of one or more classes of stock of another corporation; both corporations continue to exist as separate entities
a parent corporation owning 90% or more of a subsidiary corporation may merge the subsidiary into the parent without the approval of the shareholders of either corporation or the approval of the subsidiary’s board; however, the parent must mail a copy of the plan to each shareholder who has not waived this right
dissolution is a fundamental change that requires director and shareholder approval; it can also be pursuant to a court order; after dissolution, the corporation continues in existence for purposes of winding up; liquidation involves the process of collecting the corporate assets, paying the expenses involved, satisfying creditors’ claims, and distributing the net assets of the corporation
Corporation Pt. 7
a foreign corporation must obtain a certificate of authority from each state in which it does intrastate business; a foreign corporation is a corporation created under the laws of another state; maintaining an office in the foreign state would be an example of doing business in the foreign state; but merely maintaining a bank account, collecting a debt, or hiring employees in a foreign state are not instances of doing business in the foreign state sufficient to trigger the qualification requirement
if a corporation is faced with the prospect of being taken over and the board of directors wants to resist the takeover attempt, it may do so in a number of ways:
persuading shareholders to reject the offer
suing the person or company attempting the takeover for misrepresentation or omission and obtain an injunction against the takeover
merging with a white knight; a company with which the directors want to merge
making a self-tender; an offer to acquire stock from its own stockholders and thus retain control in order to prevent a takeover
paying greenmail; pay the person or company attempting the takeover to abandon its takeover attempt
locking up the crown jewels; give a third party an option to purchase the company’s most valuable assets
undertaking a scorched earth policy; which is to sell off assets or take out loans that would make the company less financially attractive
applying shark repellent which means amending the articles of incorporation or bylaws to make a takeover more difficult like requiring a large number of shareholders to approve the merger
