Corp Flashcards
Pre-Incorporation Contracts
Entered into by promoter to bring corp into existence
Promoter
Fiduciary to corp and enters into contracts on its behalf prior to incorporation
Liability of Promoter
Personally liable for knowingly acting on behalf of corp before incorp and
jointly and severally liable for actions even after corp comes into existence unless subsequent novation
Actual knowledge corp not in existence necessary for liability
Novation of Pre Incorp K
Agreement that moves liability
From promoter to corp
Based upon agreement between all 3
Adoption of Pre Incorp K
Corp can be liable when Corp adopts the k Occurs when corp accepts Benefits of transaction or Gives express acceptance
Corp Formation
Articles of incorporation or charter
Must be filed with state
De Jure Corp
All statutory requirements satisfied
Ultra Vires
When corp has narrow purpose but Subsequently engages in activities Outside stated purpose. 3rd party involved Cannot assert corp acted outside to Escape liability
Mod Business Purpose
Corp allowed to engage
In any legitimate business purpose and
Not allowed to void k on ultra vires
Situations to Challenge Ultra Vires
Shareholder can enjoin
Corp can take action against who engages
State may initiate proceedings
De Facto Corp
Owner makes good-faith effort to comply and
Operates business as corp without
Knowing requirements not met
Corp by Estoppel
Person who deals as if corp
Estopped from denying its existence and
Cannot seek liability of owner
Securities for Corp
Ways corp secures financing
Board of directors must generally authorize issuance
Preferred Stock
Get distribution over general
Value of Stock
Board of directors must determine
Consideration received for stock
Adequate and not subject to challenge
Par Value Stock
Assigned to stock but
Does not need to be market value
Corp required to receive minimum that value
Watered Stock
Issued for less than par value
Preemptive Stock Rights
Gives right to purchase shares when Board of directors issue new shares To maintain their proportional ownership CL right automatic ML articles of incorporation must include
Exceptions to Preemptive Rights
Stocks issued as compensation
Authorized in articles of incorpor and
Within 6 months from the effective date
Stocks sold for payment other than money
Distribution of Stock
Generally in form of dividend
Shareholder generally cannot compel to authorize distribution because discretionary UNLESS board acts in bad faith or abuses its discretion
Exceptions to distribution of Stock
May not make a distribution if insolvent or would cause corp to be insolvent
Two Tests:
Equity test and balance-sheet test
10b-5
Plaintiff purchased or sold security
Transaction involved use of interstate commerce
Engaged in fraudulent or deceptive conduct: opinions and predictions not false unless made statement without reasonable basis or in bad faith
Related to material information
Acted with scienter
Plaintiff relied on defendant’s conduct
Suffered harm because of conduct
Types of Insiders
Insider
Constructive
Tippees
Misappropriators
Insider
Director, officer, or employee who uses nonpublic information for personal gain
Constructive Insider
Person with relationship to corp that gives them access to info not available to public
Tippees
Person given info by insider or constructive insider with expectation will be used to trade securities
Tipper must receive personal benefit from disclosure or intend to make gift
Tippee must have known info in violation of tipper’s duties
Misappropriators
Person who uses confidential info
Generally when trader has fiduciary duty
16(b)
Corp must be traded on national exchange OR
Assets of more than $10 million and more than 500 shareholders
Only against corp directors, officers, shareholders who hold more than 10 percent
During six month period
Corp insider who both buys and sells stock
Required to report change in stock to SEC
Shareholders
Annual and special meetings
Notice no fewer than 10 days and no more than 60 days
Notice can be waived by attending
Voting of Shareholders
Ownership of stock entitles vote
All outstanding stock has voting right when stock sold or transferred
Record date owner has vote
Quorum Voting
Majority of shares present
Then must be majority for action to pass
Right to Elect and Remove Directors
Shareholders
Cumulative Voting
Cast all votes for one candidate to allow minority shareholders to elect
Fundamental Corp Change
Includes transfer of all corp’s assets
Sale or Merger
Special meeting with purpose specified
Must be voted on by shareholders
Approval of Fund Corp Change
Merger requires board of directors
And shareholders vote
For asset transfer
Only transferor corp entitled to vote
Proxy Voting
Must be executed in writing and Delivered to corporation or its agent Without more, valid for 11 months Revocable unless specified otherwise and Appointment of proxy is coupled with interest
Appointment of proxy is coupled with interest
Depends on whether proxy holder
Has property right in shares or
Security interest given to him to protect him
From any obligations he incurred
Shareholder Agreements
May enter into binding voting agreements for how they will vote
Does not need to be filed with corp and no time limit
Agreement between directors is unenforceable because expected to use independent judgment
Management Agreement
May agree to alter the way corp managed so long as
in articles of incorp or bylaws and approved by all shareholders at time of agreement
Written agreement signed by all shareholders at time of agreement and is made known to corp
Inspection by Shareholder
Right to inspect and copy corp records
Upon 5 days’ written notice stating proper purpose
Proper purpose for Inspection by Shareholder
Relates to shareholder’s interest in corp
Improper purposes include harassment, acquiring corporate secrets, or idle curiosity
Direct shareholder actions
Action to enforce shareholder rights or
Non-shareholder action i.e. tort
Derivative Shareholder Actions
Shareholder suing on behalf of corp
Recovery goes to the corporation
Standing for Derivative Actions
Must be shareholder at time of act at the time the action is filed, and continuing through litigation, and make written demand upon board of directors
Futility for Derivative
Only in some states when demand would be futile
Determined by factors including whether directors are disinterested and whether transaction was product of valid exercise of business judgment
Not allowed in states that have adopted RMBCA
Pierce the Veil
When plaintiff can reach through corp and hold shareholders liable
Factors to Pierce the Veil
Undercapitalization at formation
Disregard of corporate formalities
Use of corp assets as own assets
Self dealing with corp
Siphoning of corp funds
Use of corp form to avoid legal obligations
Impermissible control or domination over corp
Wrongful, misleading, or fraudulent dealings
Exceptions to Veil Piercing
Shareholder not involved with daily operations
Not held liable
Controlling Shareholders
One shareholder holds high enough percentage
To enact highest level
Anyone controlling 50% plus one is automatically
Duty to Minority of Controlling Shareholders
Selling interest to outsider Seeking to eliminate other shareholders Receiving distribution denied to others Duty to disclose info reasonable person Would consider important in deciding how to vote
Board of Directors
Manages and directs management of corp business
Only one director required modernly
Must be a natural person (no corporations)
Selection of Board of Directors
By shareholders at annual meeting
Generally serve for one-year term
May serve longer if terms are staggered
May serve after expiration until replacement
Removal of Board of Directors Req
Meeting called for purpose of removing director and must state in notice
If elected by a particular class, only be removed by same class
CL Removal of Board of Director
could only be removed for cause based on substantial grounds
ML Removal of Board of Director
Can be removed with or without cause unless the articles of incorp state otherwise
Replacement of Board of Directors
When vacancy or new directors, either shareholders OR directors may fill
Voting of Board of Directors
Must be quorum of directors present
Dissent for Vote of Board of Directors
May avoid liability for actions taken by board if
(1) He promptly objects to holding meeting, (2) ensure his dissent or abstention is noted and (3) deliver written notice before adjournment or to corp immediately after
Duty of Care BoD and Officers
Act with care person in like position would
Reasonably believe appropriate under circumstances
Entitled to rely on others retained by corp
BJR
Rebuttable presumption that director
Reasonably believed in good faith
His actions were in best interests of corp
Rebutting BJR
Not act in good faith
Not informed to extent director reasonably believed necessary before making decision
Not show objectivity from director’s relation to or control by another having material interest
Sustained failure by director to devote
Attention to an ongoing oversight
Failed to timely investigate a matter
Received financial benefit not entitled to
Duty of Loyalty BoD and Officers
Act in manner reasonably believes in
Best interests of the corp
If places own interests before corp
Self Dealing
Transaction between director and corp that normally requires approval of board of directors and of such financial significance to director that would reasonably be expected to influence director’s vote on the transaction
Applies to any persons related to director
Safe Harbor of Self Deaing
Transaction may still be upheld if:
Ratification by board of directors
Ratification by shareholders, or
Entire fairness to the corp
Corp Opportunity Doctrine
Usurping corp opportunity rather than offering opportunity to corp
ML financial inability of corp to take advantage is not adequate defense
Two Tests for Corp Opportunity Doctrine
Interest or Expectancy
Line of Business
Interest or Expectancy
Whether corp has existing interest or
Expectancy arising from existing right
Line of Business
Whether opportunity within corp’s
Current or prospective line of business
Officers of Corp
Consist of president, secretary, and treasurer
Elected by the board of directors
Agent Authority
Liability of Officers of Corp
Not incur liability to 3rd parties merely for performance of duties for corp
Can liable if acted in personal capacity
Voluntary Dissolution Prior to Issue Stock
Corp may voluntarily dissolve by majority vote
Voluntary Dissolution After Issue Stock
Corp may voluntarily dissolve if board of directors adopts proposal and
Majority of shareholders approve
Winding up Corp
May continue to exist as corp for Limited purpose of winding up including: Collecting assets Disposing of property Discharging liabilities, and Distributing property among shareholders
Distribution of Corp
Creditors of corp
Obligations owed to shareholders
Shareholders of stock preferences in liquidation
Shareholders of other stock
Involuntary Dissolution Shareholder
Corp assets being misapplied or wasted
Directors acting illegally, oppressively, or fraudulently
Directors deadlocked in management of corp, or
Shareholders deadlocked in voting and failed to elect successors
Involuntary Dissolution Creditor
If the corporation is insolvent
Closely Held Corp
Few shareholders and
More relaxed style of governance
S Corp
Elects to avoid double taxation
Income and expenses of corp passed through shareholders
Corp cannot have more than 100 shareholders and
No more than one class of stock
Each shareholder must consent to S corporation
LLC
Entity distinct from its members that enjoys
Pass-through tax advantage of a partnership but
Limited liability of corp
Management of LLC
Defaulted to member management
Unless operating agreement otherwise
Liability of members of LLC
A member is generally not liable for an LLC’s obligations but many states allow a piercing of the veil of an LLC by showing (1) undercapitalization, (2) commingling of assets, (3) confusion of business affairs, or (4) deception to creditors.
Pierce the Veil LLC
Mere Instrumentality:
Members dominated entity such had no will of its own
Members used domination to commit fraud or wrong
Control and wrongful action proximately caused injury
Unity of Interest and Ownership:
Unity of interest and ownership between
Entity and members that LLC did not have
Existence independent of members and
Failure to pierce veil would be unjust or inequitable
Duties of Members of LLC
Care and Loyalty
Dissolution of LLC
Consent of all members
Passage of 90 consecutive days without members
Court order or
Event causing dissolution per operating agreement
Board of Directors Notice of Meeting
Directors are entitled to notice of a special meeting. The notice must be provided at least two days prior to the meeting and should state the date, time, and place of the meeting. The notice does not need to describe the purpose.
Waiver of Notice Board of Directors
A director’s attendance of the meeting waives notice of the meeting unless the director promptly objects to lack of notice.
LLC Derivative Suit
Like a corporation, an LLC is a legally recognized business entity. As such, it has the right to sue and be sued. Members of an LLC may bring a derivative action on behalf of the LLC to enforce rights of the LLC. To do so, demand must be made on the other members to bring an action if the member fails to do so, unless such demand would be futile.
LLC Direct Suit
In some circumstances, members may also bring a direct action against the LLC and other members. Although a member may do this to enforce the member’s rights, members do not have the right to maintain a direct action against the manager of the LLC when the alleged misconduct caused harm only to the LLC.
LLC Duty of Loyalty
The duty of loyalty in a member-managed LLC includes the duty to account to the company for any benefit derived by the member related to the company’s activities or property. A member’s duty of care is subject to the business judgment rule.
Shareholder Voting By Laws
Shareholders have power to amend
Corporation’s bylaws
Enforceable if do not conflict with state law or articles of incorporation
Can amend or repeal existing bylaw provisions
Even if they were added by BOD
Board of Director By Law
Can amend bylaws unless
Articles of incorporation or
Vote by shareholders limits this power
Board of Director Amending Shareholder Voted By Laws
Shareholder-approved bylaw dealing with
Director nominations may not
Limit board’s power to amend, add, or repeal
To ensure an orderly process
