Ch 18 - Corporations Flashcards
Corporation
Legal entity created and recognized by state laws that enjoys the same rights and privileges as natural person (constitutional rights, access to courts)
Responsibility for management of company rests with
Board of directors
What do board of directors do?
Make policy decisions, hire officers to run corp
Shareholders
When individual purchases a share of stock in a corp and becomes an owner
Are shareholders generally personally liable for corporate acts?
No
Corporations use double tax
Taxed first to corp then to shareholders via dividends
Doctrine of respondeat superior
Corp may be held liable by torts/crimes committed by agents (CEO, CFO, etc.)
Responsible officers doctrine
Corporate officers are held to strict liability, may go to prison
Promoter’s Liability
Promoter is personally liable for pre-incorporation contracts on behalf of the corp unless third party agrees to hold future corp liable
De Jure Corporations
If certain substantial statutory requirements are met when starting a corp, the corp is deemed to exist and cannot be attacked by third parties (MINOR DEFECTS)
De Facto Corporation
If certain major requirements are not met when starting a corp, but good faith is used, some states will limit individual libaility (but not NC)
Ultra Vires
When corp acts beyond expressed or implied powers of corp, shareholders can seek injunction to stop them/sue
Courts may pierce the veil and hold shareholders liable if:
Corp never makes a profit and uses under-capitalization for fraud, set up to evade legal obligation, commingling of personal and corporate interests
Alter-ego theory
Personally liable if it’s impossible to distinguish between funds of you and the corporation
Quorum
Stated minimum number of members that must be present to conduct official corporate business
Rights of directors
May participate in corp decisions and be notified of meetings, right of inspection to books and records, corp must reimburse to protect the board from personal liability
Care: Duty to Make Informed Decisions
Directors and officers are fully informed on corporate matters
Care: Duty of Exercise Reasonable Supervision
Supervise officers when work is delegated
Care: Document Dissenting Directors
If director votes against corp action and corp is later sued for action, that director is not individually liable
Business Judgement Rule
Immunizes a director or officer from liability from bad decisions made from honest mistakes in judgement (officer took reasonable steps to get informed, had rational basis for decision, acted in best interest of corp)
Duty of Loyalty
Putting corp interests over your own (no competition with corp, no insider trading, no conflicts of interest, etc.)
Shareholders Powers
- Must approve all fundamental changes to corp
- Vote to amend articles or bylaws
- Vote to approve mergers or acquisitions
- Approve sale of corp assets on dissolution
- Shareholders elect and remove board of directors
Shareholder Quorum Requirements
Shareholders representing more than 50% of the issued SHARES must be present to conduct business
Shareholder Preemptive Rights
Allows them to buy newly issued stock as soon as it’s issued
Stock Warrant
Right to buy stock at stated price
Dividends
Distribution of corporate profits or income ordered by the board
Shareholder’s Derivative Suit
Lawsuit brought by shareholders against third party (May be board members) that has harmed company
Shareholder’s Derivative Suit (con’t):
Directors refuse or fail to correct a wrong
Make written demand to board
Rare because any damages normally go back to company, not you
Who has ultimate responsibility for corporate affairs?
Board of directors
Vacancies on Board
If director dies, the articles will outline election process
Corporations can be ____ for criminal acts, but can only be ______
Liable, fined
Inside director
Also an officer and is paid by the corp
Outside director
Doesn’t hold management position, generally not paid by corp
