CA Corps Flashcards
Nature of Corporations (def + 4 key characteristics + advantage/disadvantage)
A corp is a legal entity distinct from its owners, the shareholders (SHs).
A corporation has 4 key characteristics:
(1) perpetual or continuous existence; it survives the death or replacement of its owners (SHs);
(2) centralized management of its assets and business;
(3) limited liability for its owners (SHs), who are generally shielded from personal liability for the corp’s debts and obligations; and
(4) free transferability of ownership interest (shares).
Advantage + Disadvantage
- Advantage: One potential advantage of the corporate form is that it facilitates the raising of significant amounts of capital.
- Disadvantage: One potential disadvantage of the corporate form is that it is subject to “double taxation,” that is, the profits are taxed as corporate income and then, when the profits are distributed to SHs as dividends, they are taxed again as the personal income of individual SHs.
Nature of Corporations (Structure)
(1) Corporate DIRECTORS sit on the board and are responsible for governing the corp.
(2) Corporate OFFICERS are delegated the responsibility for managing the conduct of the corporate business and serve as As of the corp.
(3) SHs are owners of the corp but generally will not exercise control over the management of the corporate business.
Formation –> Promoters and Pre-Incorporation Transactions: Promoters Generally
Promoters:
(1) intent on forming a corp; and
(2) engaged in some transaction entered into on behalf of this not-yet-formed corp.
Promoters take the necessary preliminary steps for creating a corp; these steps often involve Ks that the promoters enter into for the benefit of the not-yet-formed corp.
Promoters are not As of the contemplated corp.
- –> Bc the corp is not yet in existence, it cannot be a P to any agency relationship w/ a promoter.
- –> Consequently, promoters have no power to bind the not- yet-formed corp.
When there is more than one promoter, there is a mutual agency (or a partnership-type relationship) among the promoters themselves.
—> In such a case, Ks entered into w/in the scope of the promotion would bind each promoter, and each promoter would become J/S liable for these Ks.
Formation –> Promoters and Pre-Incorporation Transactions: Pre-Incorporation Transactions - Liability Before the Formation of the Corporation
In general, promoters are PERSONALLY liable on the Ks they enter into for the benefit of a not-yet-existent corp.
Promoters are not liable on pre-incorporation Ks if:
(1) the pre-incorp K specifically disclaims personal liability of the promoter; or
(2) circumstances demonstrate that the other party agreed to look only to the corp for performance.
Formation –> Promoters and Pre-Incorporation Transactions: Pre-Incorporation Transactions - Liability After the Formation of the Corporation (A Corporation’s Liability on a Pre-Incorporation Contract)
A corp is not liable on any pre-incorporation agreements its promoters entered into on its behalf unless (after it comes into existence) the corp ASSUMES liability by its own act through ADOPTION or NOVATION.
—> Bc promoters are not the As of the not-yet-formed corp and so do not have the power to bind the corp to Ks they enter into in anticipation of the corp being formed.
Formation –> Promoters and Pre-Incorporation Transactions: Pre-Incorporation Transactions - Liability After the Formation of the Corporation (Impact of Adoptions and Novations on an Promoter’s Liability)
If a corp adopts the K of a promoter, the promoters will REMAIN liable on the K to the 3rd party but will now be entitled to INDEMNIFICATION from the newly created corp.
—> Can’t ratify bc corp does not exist when K is signed, but can adopt.
Adoption can be EXPRESS or IMPLIED:
(1) Express adoption generally occurs when the board passes a RESOLUTION.
(2) Implied adoption occurs when the corp accepts or acknowledges the BENEFITS of the K in some manner.
If a NOVATION occurs, the promoters are RELEASED from all personal liability on the pre-incorporation K.
—> A novation occurs when 3 parties—the promoter, the 2nd party to the original K, and the corp— agree to substitution of the corp as a party to the K in place of the promoter.
Formation –> Incorporation and Organization: Requirements for Incorporation - A Properly Executed Articles of Incorporation
Articles of incorp are prepared by an INCORPORATOR (or incorporators) who EXECUTES and FILES the AoI.
To be properly executed, the AoI must include:
(1) SIGNATURES of the initial directors, if named in the articles, or the incorporators;
(2) a corporate NAME;
- –> The corporate name must generally be distinguishable from other corporate names authorized to transact business in CA.
- –> However, except for close corps, CA imposes no general req that a corporate name include the word “corporation,” “incorporated,” or “limited” or, alternatively, an abbreviation of one of these words.
(3) an applicable statement of PURPOSE;
- –> In general, the statement of purpose for all corps shall provide that the company’s purpose is to engage in any lawful activity.
- –> Affirmative statements of purpose need to be more specific only w/ respect to corps engaged in certain professions or engaged in the banking, trust company, or insurance businesses.
- –> However, in all cases, the articles may include express limitations on the corp’s purpose.
(4) the name and address (N&A) of its initial registered agent;
(5) the ADDRESS of the corp; and
(6) the # of SHARES of each class (if more than one class of stock) the corp is authorized to issue.
The ULTRA VIRES DOCTRINE concerns corporate activity that is beyond a corp’s authority as set forth in its governing docs and statement of purpose.
- –> This doctrine provides that a corp cannot be obliged to undertake a K or activity beyond the scope of its powers.
- –> However, in CA, this doctrine has LITTLE applicability today:
(1) in CA, most AoI authorize the corp to engage in all legal activities.
(2) in CA, this doctrine cannot be raised as a defense against 3rd parties.
Formation –> Incorporation and Organization: Requirements for Incorporation - Properly Filed Articles of Incorporation
An incorporator (or incorporators) must deliver to the Secretary of State’s office: properly executed AoI accompanied by the applicable filing fee.
- –> The effective date of incorporation is the date of filing.
- –> Corporate existence begins at the moment of incorporation, and the Secretary of State’s filing of the articles is generally conclusive proof that all conditions precedent to incorporation have been satisfied.
Formation –> Incorporation and Organization: Organizing a Corporation
After incorp, a corp must be properly organized in accordance w/ statutory formalities.
—> Failure to do so may expose SHs to personal liability for corporate debt and obligations.
Initial Directors
(1) When initial directors are named in the AoI, these directors must hold an organizational meeting to complete the organization of the corp.
- –> Completing the organization of the corp reqs: the appointment of corporate officers and the adoption of by-laws.
(2) When initial directors are NOT named in the AoI, the incorporators must hold an organizational meeting to elect the directors.
- –> Thereafter, completing the organization of the corp—that is, appointing officers and adopting bylaws—can be accomplished by either the incorporators or the directors.
Distinction Between Reqs for Incorporating and Reqs for Organizing
- –> Forming a corp reqs the filing of its properly executed AoI.
- –> Organizing reqs: (1) the naming or election of directors, (2) the appointing of officers, and (3) the adopting of by-laws.
Formation –> Corporation by Estoppel
Traditionally, 2 doctrines were used to grapple w/ defective incorps:
(1) de facto corp and (2) corp by estoppel.
- —> Today, the de facto doctrine is rarely applicable bc the state must approve the articles before they are filed and a certificate from the secretary of state, which is typically issued on or quite close to the filing date, is conclusive evidence of incorp.
- —> The corp by estoppel doctrine can be used as a shield (to defend against a claim on a K) or as a sword (to assert a claim on a K).
- —> The corp by estoppel doctrine is not a defense to a tort claim, as the claimant has not previously dealt with the principals as if they were a corp;
- –> However, in K claims, where the parties necessarily had a PRIOR BUSINESS RELATIONSHIP, the doctrine becomes relevant and potentially applicable.
When a contractual dispute arises between a 3rd party and an entity believed to be a corp, a ct may estop the 3rd party from alleging that the corp is defectively incorporated if that would UNJUSTLY EXPOSE the corporate Ps to liability.
—> When a contractual dispute arises between a 3rd party and an entity believed to be a corp, a ct may estop the business entity from alleging that it is not legally a corp liable on the K as a corp if that would UNJUSTLY DEPRIVE the 3rd party of relief from injury.
Directors and Officers: Powers, Duties, and Exposure to Liability –> Corporate Management: The Powers of Directors and Officers - The Board of Directors (The Individual Director v. The Collective Board)
Subject to any limitation set forth in the AoI, the management of the corp’s business and the exercise of corporate power must be by or under the direction of the corp’s board of directors (BoD).
—> Unless otherwise authorized by the AoI or prior BoD decisions, individual directors do not have the power to set corp policy or even to act as its A when entering into Ks.
Directors and Officers: Powers, Duties, and Exposure to Liability –> Corporate Management: The Powers of Directors and Officers - The Board of Directors (What Constitutes an Act of the Board?)
The board acts COLLECTIVELY.
- –> As such, the prerequisite of all board action is that it reqs the participation of a QUORUM of the board.
- –> A quorum refers to the minimal portion of the authorized # of directors req’d to be present for board action to occur.
Unless otherwise restricted by the articles or bylaws, the board can transact business in the ABSENCE of a meeting so long as there is WRITTEN CONSENT to an action that is signed by ALL members of the board.
—> Bc this rule reqs the unanimous consent of all directors, it necessarily satisfies the quorum req.
At a meeting of the BoD duly held, legally competent board action reqs the presence of a QUORUM.
- –> A MAJORITY of the authorized directors constitutes a quorum, unless the articles or bylaws provide otherwise, but in no case shall a quorum consist of LESS than 1/3 of the authorized directors or LESS than 2 directors.
- –> Assuming a quorum is present at a duly held meeting of the board, an act of the board occurs upon the decision of a majority of directors present unless the articles or bylaws req that there be a greater margin.
Directors and Officers: Powers, Duties, and Exposure to Liability –> Corporate Management: The Powers of Directors and Officers - The Board of Directors (Limits on Board Action: The Ultra Vires Doctrine)
The statement of corporate PURPOSE in the AoI authorizes the board’s powers while also limiting the authority of the corp’s representatives.
—> However, the limits of authority cannot be asserted as between the corp (or its SHs) and 3rd parties.
The limits of a corp’s authority can be asserted in the following instances:
(1) in a proceeding by a SH to ENJOIN the doing of business not authorized by the articles; or
(2) in a proceeding by the corp or a SH bringing a DERIVATE SUIT that is brought against directors or officers for violation of their authority.
Directors and Officers: Powers, Duties, and Exposure to Liability –> Corporate Management: The Powers of Directors and Officers - The Board of Directors (Limits on Board Members: Removal)
A director may be removed w/ or w/o cause by the majority of the shares entitled to vote in an election of directors.
- –> A director adjudicated to be of unsound mind or convicted of a felony may be removed by the board itself.
- –> A director may be removed by the superior court upon a suit by SHs holding at least 10% of outstanding shares and a finding that (w/ reference to the corporation) the director had acted fraudulently or dishonestly or had grossly abused authority or discretion.
Directors and Officers: Powers, Duties, and Exposure to Liability –> Corporate Management: The Powers of Directors and Officers - Corporate Officers
The powers of a corporate officer are the powers of an A.
- –> A corporate officer or A may enter into any transaction for which he has been expressly or implicitly AUTHORIZED under the articles of incorp, the bylaws, an employment K, or a Board resolution.
- –> Corporate officers have the implied authority to enter into transactions that are REASONABLY RELATED to performing the duties for which they are responsible.
If a corps essay presents you with a corporate officer who acts w/o or beyond his actual authority, consider whether the officer had apparent authority to act or whether the officer’s actions were later ratified by the Board.
Directors and Officers: Powers, Duties, and Exposure to Liability –> Corporate Management: The Fiduciary Duties of Directors and Officers - Duty of Care
Directors and officers must discharge their duties:
(1) in good faith;
(2) w/ the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and
(3) in a manner they reasonably believe to be in the best interests of the corp.
Business Judgment Rule
According to the business judgment rule, there is a rebuttable presumption that, when making a business decision, directors and officers have acted:
(1) on an informed basis;
(2) in good faith; and
(3) w/ honest belief that their decision was in the corp’s best interest.
Directors and Officers: Powers, Duties, and Exposure to Liability –> Corporate Management: The Fiduciary Duties of Directors and Officers - Duty of Loyalty
The fiduciary duty of officers, directors, and employees reqs that they be loyal to the corp and not promote their own interests in a manner injurious to it.
Conflicts of interest typically arise when directors or officers:
(1) transact business w/ the corp (self-dealing);
(2) usurp a corporate opportunity; or
- –> Regarding usurpation of a corporate opportunity, no usurpation will be found if the corp was (after full disclosure) given the opportunity to first pursue it and declined to do so or was otherwise unable to take advantage of the opportunity.
- –> The following are factors to consider when determining when an “opportunity” belongs to the corp:
a. whether the individual became aware of the opportunity while acting in his capacity as a director or officer;
b. whether the business constituting the opportunity is closely related to that of the corp;
c. whether the board had expressed an interest in, or expectancy of, acquiring that type of business;
d. whether the opportunity is in the corp’s line of business; and
e. whether corporate funds or facilities were used in discovering or developing the opportunity.
(3) directly compete with the corp.
When a director or officer is involved in a “conflict of interest transaction,” the duty of loyalty reqs the director or officer to notify the other directors, officers, or SHs of all of the material facts regarding the conflict.
—> A “conflict of interest transaction” is of no effect unless upon full disclosure, non-interested directors or SHs vote to authorize or approve the transaction.
Directors and Officers: Powers, Duties, and Exposure to Liability –> Corporate Management: Directors, Officers, and Their Exposure to Liability
Directors and officers are both liable to the corp for damages arising from the violation of their FIDUCIARY DUTIES or from their UNAUTHORIZED ACTIONS (whether or not ultra vires action or otherwise outside the scope of their authority).
If a corporate opportunity has been usurped by a director or officer, a ct may award damages or, alternatively, order the director or officer to convey to the corp the profit, property or income derived from the misappropriation.
