Ch. 39 Corporations - Formation and Financing Flashcards
What is the Model Business Corporation Act (MBCA)?
- Codification of modern corporation law that has been influential in shaping state corporation statutes
What is the most recent version of the MBCA referred to as?
Revised Model Business Corporation Act (RMBCA)
Is a corporation recognized as a “person”?
YES
In a corporation, who is responsible for the overall management of the firm?
Board of Directors
How are members of the BOD chosen?
Elected by shareholders
When a corporation earns profits, what are two things it can do?
1) Pass them to S/Hs in form of dividends
2) Retain them as profits (RE)
In regards to taxes, what is a major disadvantage of the corporate form?
Double taxation
Why do some US companies use holding companies?
To reduce or defer their US income taxes
What is a holding company (sometimes referred to as a parent company)?
Company whose business activity consists of holding shares in another company
Why would a US corporation set up a holding company in a low-tax offshore environment?
B/c any profits received by the holding company on these investments are taxed at the rate of the offshore jurisdiction
Is a corporation liable for the torts committed by its agents or officers outside the course and scope of their employment?
NO
Is a corporation liable for the torts committed by its agents or officers within the course and scope of their employment?
YES (follows doctrine of respondeat superior)
What was the key question in the Belmont v MB Investment Partners case?
Whether corporate employer of the officer (who perpetrated fraudulent scheme) could be liable for his actions
May a corporation be held liable for the criminal acts of its agents and employees?
YES (fines)
The classification of a corporation normally depends on what three things?
- its location
- its purpose
- its ownership characteristics
What would a corporation’s home state refer to it as?
Domestic corporation
What is a corporation formed in one state but doing business in another referred to as in the second state?
Foreign corporation
What is a corporation formed in another country but doing business in the US referred to as in the US?
Alien corporation
What may a corporation have to obtain to do business in a state other than its state of incorporation?
Certificate of authority
Does a foreign corporation normally need a certificate of authority to sell goods or services via the Internet or by mail? Why or why not?
- NO
- B/c most state statutes specify certain activities (i.e soliciting orders via Internet) that are not considered doing business within the state
What would you call a corporation formed by the government to meet some political or governmental purpose?
Public corporation
What would you call a corporation whose shares are publicly traded in a securities market, such as the NY Stock Exchange or the NASDAQ?
Publicly held corporation
Give an example of a public corporation.
- Cities and towns that incorporate
- USPS
- AMTRAK
What would you call a corporation formed for purposes other than making a profit?
Non-profit or not-for-profit corporation
Give an example of a nonprofit corporation.
- Private hospitals
- Educational institutions
- Charities
- Religious organizations
What would you call a corporation whose shares are held by members of a family or by relatively few persons?
Close corporation (b/c # shareholders so small, there is no trading market for the shares)
What are close corporations also referred to as?
- Closely held, family, or privately held corporations
In practice, how are close corporations often operated?
Often operated like a partnership
What flexibility does the RMBCA give a close corporation in determining its rules of operation?
- If all corporation’s S/Hs agree in writing, the corporation can operate w/o directors and bylaws
- Corporation can operate w/o annual or special S/Hs or directors’ meetings, stock certificates, or formal records of S/Hs or directors’ decisions
What does management of a close corporation resemble? How?
- Sole proprietorship or partnership
- A single S/H or tightly knit group of S/Hs usually hold the positions of directors and officers
What problem arises with transfer of shares in close corporations?
- Transfer of one S/H’s shares to someone else can cause serious management problems
- B/c other S/Hs may find themselves required to share control with someone they do not know or like
What do some states do to prevent the problem that arises with transfer of shares in close corporations?
- Some states prohibit transfer of close corporation shares unless certain persons (S/Hs, family members, the corporation) are first given the opportunity to purchase the shares for the same price
How can control of a close corporation be stabilized?
Through use of shareholder agreement
If a majority S/H in a close corporation misappropriates close corporation funds, what is the normal remedy?
- Injured minority S/Hs have their shares appraised and are paid FMV for them
What was the allegation in the Rubin v. Murray case? How did the Court rule?
- Minority S/H alleged that majority S/Hs paid themselves excessive compensation in breach of their fiduciary duty
- Court ruled in minority S/Hs favor
A close corporation that meets the qualifying requirements specified in Subchapter S of the Internal Revenue Code can choose to operate as a what?
S corporation
If a corporation doesn’t elect S corporation status, how will it automatically be taxed?
Automatically be taxed under Subchapter C
If a corporation has S corporation status, what can it avoid?
Imposition of income taxes at the corporate level (while retaining limited liability)
What are the most important requirements for S corporation status?
1) Corp must be a domestic corp.
2) Corp must not be a member of an affiliated group of corporations
3) S/Hs of corp must be individuals, estates, or certain trusts and tax-exempt organizations
4) Corp must have no more than 100 S/Hs
5) Corp must have only one class of stock, although all S/Hs need not have the same voting rights
6) No S/H of the corp may be a non-resident alien
If a corporation has losses, the S election allows the S/Hs to do what?
- Use the losses to offset other income
For liability purposes, how do some courts treat a professional corporation?
Somewhat like a partnership and hold each professional liable for any malpractice committed w/i the scope of the business by the others in the firm
With the exception of malpractice or a breach of duty to clients or patients, can a S/H in a professional corporation generally be held liable for the torts committed by other professionals at the firm?
NO
What would you call a for-profit corporation that seeks to have a material positive impact on society and the environment?
Benefit corporation
What are three ways that benefit corporations differ from traditional corporations?
1) Purpose: Corp is designed to make a profit, but its purpose is to benefit the public as a whole.
2) Accountability: S/Hs of a benefit corporation determine whether the corp has achieved a material positive impact
3) Transparency: Corp must issue annual benefit report on its overall social and environmental performance that uses a recognized third-party standard to assess its performance (report must be delivered to S/Hs and posted on a public website)
In regards to benefit corporations, if S/Hs believe the corporation failed to pursue or create public benefit, what do they have the right to do?
- Have right of private action (called benefit enforcement proceeding) enabling them to sue
Due to the relative ease of forming a corporation in most states today, are promotional activities often used?
- No
- Persons incorporating their business rarely engage in preliminary promotional activities
Personal liability continues until the newly formed corporation assumes liability for the preincorporation contracts through a what?
Novation
What are the basic steps of incorporation?
1) Select a state of incorp
2) Secure corporate name
3) Prep articles of incorp
4) File articles of incorp with secretary of state
Which state has historically had the least restrictive laws and provisions that favor corporate management?
Delaware
For reasons of convenience and cost, businesses often choose to incorporate in which state?
State in which most of the corporation’s business will be conducted
The choice of corporate name is subject to whose approval?
State approval (to ensure against duplication or deception)
In securing a corporate name, what should you check first?
First check available domain names
Can a new corporation’s name be the same (or deceptively similar to) the name of an existing corporation doing business w/i the same state?
NO
If a firm does business under a name that is the same as or deceptively similar to an existing company’s name, what may it be liable for?
Trade name infringement
What is the primary document needed to incorporate a business?
Articles of incorporation
What do the articles in the articles of incorporation serve as?
- Serve as a primary source of authority for its future organization and business functions
What would you call the person or persons who execute (sign) the articles?
Incorporators
The articles of incorporation must generally include what info?
1) Name of corp
2) #shares the corp is authorized to issue
3) Name and street address of corporation’s initial registered agent and registered office
4) Name and address of each incorporator
In addition to the info that must be included in the articles of incorporation, what may be included as well?
- Names and addresses of initial members of BOD
- Duration and purpose of the corporation
What spells out the details of the firm’s operations?
Bylaws (internal rules of management adopted by the corporation at its first organization meeting)
The corporation must indicate the name and address of a specific person who has been designated as an agent. The registered agent is the person who can do what?
Receive legal documents (such as orders to appear in court) on behalf of the corporation
A corporation has a perpetual existence unless what states otherwise?
Articles of incorporation
Can bylaws conflict with the incorporation statute or the articles of incorporation?
NO
What do the bylaws typically describe?
- Voting requirements for S/Hs
- Election of the BOD
- Methods of replacing directors
- Manner and time of holding S/Hs’ and board meetings
Once the articles of incorporation have been prepared and signed, where are they usually sent?
- Sent to appropriate state official, usually secretary of state, along w/ required filing fee
In most states, when the secretary of state receives the articles of incorporation, what do they do?
- Stamps articles “Filed”
- Returns copy of articles to incorporators
After incorporation, the first organizational meeting must be held to do what?
Adopt bylaws (internal rules of management for the corp)
If the articles of incorporation named the BODs, then what do the BODs do in the first organizational meeting?
- BODs (by majority vote) call the meeting to adopt the bylaws and complete the company’s organization
If the articles of incorporation did not name the BODs, then what do the incorporators do in the first organizational meeting?
- Call the meeting to elect the BODs and adopt the bylaws
When can errors in incorporation procedures become important?
When a 3rd party who is attempting to enforce a contract or bring a suit for a tort injury learns of these errors
If a corporation has substantially complied with all conditions precedent to incorporation, what kind of of existence is the corporation said to have?
De jure existence (rightful and lawful)
In most states, what is conclusive proof that all mandatory statutory provisions have been met?
Secretary of state’s filing of articles of incorporation
What does de jure mean?
Rightful and lawful
Sometimes incorporators fail to comply with all statutory mandates. If the defect is minor (i.e. incorrect address listed on articles of incorporation), what will most courts do?
Overlook defect and find that a corporation (de jure) exists
In states that still recognize the common law doctrine of de facto corporation, the courts will treat a corporation as a legal corporation despite the defect in its formation if what three requirements are met?
1) A state statute exists under which the corporation can be validly incorporated
2) The parties have made a good faith attempt to comply with the statute
3) The parties have already undertaken to do business as a corporation
In most jurisdictions, if there is a substantial defect in complying with the incorporation statute, does the corporation legally exist?
NO (and incorporators are personally liable)
In what document are the express powers of a corporation found?
- In its articles of incorporation
- In the law of the sate of incorporation
- In the state and federal constitutions
If conflict arises among the various documents involving a corporation, what is the order of priority used?
1) US Constitution
2) State constitutions
3) State statutes
4) Articles of incorporation
5) Bylaws
6) Resolutions of the BODs
What does ultra vires mean?
“Beyond the power”
True or false.
In corporate law, acts of a corporation that are beyond its express or implied powers are ultra vires acts.
True
If the owners use a corporate entity to perpetrate a fraud, circumvent the law, or in some other way accomplish an illegitimate objective, what can the court do?
- Court will ignore corporate structure and pierce the corporate veil, exposing the S/Hs to personal liability
