Corp/Agency/Partnerships Flashcards
Promoters?
one who causes a corp to be formed, organized & financed
- Promoters can be liable for pre-incorporation transactions as long as the person they are entering into a contract with has no actual knowledge that the corporation does not exist.
- Corporations, by default, are not liable for pre-incorporation transactions.
- Exception: The corporation can adopt and ratify the transactions that the promoter entered into.
- Fiduciary duty of disclosure: fully all mat’l facts concerning any assets they sell to the corp, including whether the promote is profiting off the sale
- Breach of fiduciary duty, corp may either: (1) avoid the transaction; OR hold the promoter liable for the secret profits.
FORMATION OF CORPORATIONS:
Incorporation?
- To form a corporation, incorporators must file articles of incorporation with the Dep’t of State.
- AoI REQ: NAME of the Corporation (includes company, corp or inc. & not imply corp is a natural person, affiliated with gov or illegal); ADDRESS (corp’s principal office, registered office, & names & address of each incorporator); & # SHARES.
- AoI MAY: Name Initial Directors; Par value of shares (prices below which the corporation cannot issue the shares); Limit the duration of corp; how business run or operated.
FORMATION OF CORPORATIONS:
Defective Incorporation?
statutory compliance is insufficient for de jure status
- De Facto Corporation: may have been formed if:
GF, colorable attempt to comply; & Corporate principals, in GF, acted as if they were a corp
- Corporation by Estoppel: Will bar a 3rd party from: from saying its not a corp if they dealt w/ de facto corp as though it was a de jure (: organized in compliance w/ the statute) corp. In the same manner, a corp which has held itself out to be a corp cannot try to avoid liability under this theory.
FORMATION OF CORPORATIONS:
Corporate Purpose
Default rule: A Florida corporation’s “purpose” is to engage in any and all lawful business
- The articles of incorporation narrow the default corporate “purpose.”
- Ex: A corporation’s articles can state: “The purpose of this corporation is to buy and raise chickens.” If the corporation then wants to buy and raise cows, it cannot do that.
FORMATION OF CORPORATIONS:
Defective Incorporation?
FORMATION OF CORPORATIONS:
Ultra Vires
CoA brought by a SH against a BoD for undertaking an action beyond corp’s authority, as set for in AoI. [if corp narrows its purpose]
If a corporation takes an act outside its purpose, the act is said to be ultra vires (beyond the powers).
- Shareholder (sue to enjoin the corporation’s ultra vires act), corp (sue to get an injunction against one of its managers) and state can sue.
- Court may uphold such challenge if: 1) equitable to strike down the ultra vires action; and All affected parties are joined to the suit
- Damages from such a challenge cannot include anticipated profits.
FORMATION OF CORPORATIONS:
Hierarchy of authority:
STATUTES ► ARTICLES OF INCORP ► BYLAWS
- Bylaws: internal rules & regulations enacted by the corp to govern its actions & relation to SHs, directors & officers
- Bylaws can be altered, amended, or appealed, by the BoD or SHs
FORMATION OF CORPORATIONS:
Tax Rate & Reporting
- After an exemption of $25,000 of income, Florida corporations pay an income tax of 5.5% to Florida.
- They may also pay federal income tax.
- Florida corporations must file annual report with the Department of State.
- If they don’t, they may be dissolved
Corporation can issue two basic kinds of securities:
- stocks, which are typically associated with ownership and control of a business (a corp must have stocks), and
- debt or bonds, which are typically associated with loans made to a business.
CORPORATE STOCK AND SECURITIES:
Stock
certificated interest that SH receive in consideration of the capital put into the corporation
- Stocks can be divided into classes
- 2 rights that at least one class of shares needs to have (rights don’t need to be held by the same class(es) of shares):
- Final Voting Rights; &
- Ability to receive the net assets
- By default, Directors issues shares; however, AoI may allow SHs to issues shares
*
SHAREHOLDER RIGHTS AND DUTIES:
Shareholder Meetings
- Florida requires Florida corps to hold an annual SH meeting
- Directors or SHs who own 10% of the outstanding shares may call special meetings.
- SHs generally must receive b/w 10-60 days’ notice before a meeting.
- Shareholders may waive notice of the meeting by showing up or by sending a written objection stating that they did not have notice.
- Instead of a meeting, shareholders may take action by unanimous written consent
SHAREHOLDER RIGHTS AND DUTIES:
Shareholder Voting Quorum
By default, a quorum of 50% is necessary before a vote may be taken at a meeting. The articles of incorporation may increase the quorum requirement to any level. Corp cannot lower quorum amount to any level.
SHAREHOLDER RIGHTS AND DUTIES:
Shareholder Agreements
Shareholders in corporations with 100 or fewer shareholders may unanimously enter into agreements that:
- eliminate the board of directors;
- limit the powers of the board of directors; &
- permit one shareholder, or any group of them, to exercise corporate powers
SHAREHOLDER RIGHTS AND DUTIES:
Inspection Rights
- Shareholders may inspect corporate records if their purpose is to do anything that relates to their shareholder interest
- The corporation may charge the shareholder reasonable fees
SHAREHOLDER RIGHTS AND DUTIES:
Shareholder Suits
- direct action: SH sues on his own behalf to redress a personal injury
-
derivative action: SH sues on behalf of corp to redress a wrong to corp when it fails to enforce its right. [equitable action & damages go to corp]
- Before a derivative action is filed, a shareholder must make “demand” on the board unless demand would be futile or delay would lead to irreparable injury
- Reimbursement for litigation expenses:
- Π SH: when corp recovers a substantial benefit
- Corp: Π SH uses the suit for improper purpose (subjective) or there was no reasonable cause (objective)
SHAREHOLDER RIGHTS AND DUTIES:
Shareholder Duties to Each Other
- Shareholders generally do not have duties to other shareholders.
- A shareholder may owe fiduciary duties to other shareholders when the controlling shareholder seeks to restrict minority shareholders or when they aretrying to eliminate them from the corporation entirely
DIRECTORS AND OFFICERS:
Structure of the Board of Directors
- natural person
- 18+ years old
- corp must have at least 1
- non-SH may serve
DIRECTORS AND OFFICERS:
Indemnification of Directors and Officers
- Corps MUST indemnify directors for reasonable costs incurred in successfully defending a claim.
- Corps MAY indemnify directors for all breaches of duty of care as long as they acted in good faith
- Corporations MAY NOT indemnify directors for breaches of the duty of loyalty
* Indemnity may take the form of advances of litigation expenses or liability insurance
OTHER BUSINESS ENTITIES AND TERMINOLOGY:
Definitions:
close corporation?
professional corp
- closely held corporation; a corporation with relatively few shareholders
- corporation that provides professional services
OTHER BUSINESS ENTITIES AND TERMINOLOGY:
Definitions:
foreign corporation?
any corp incorporated in outside of Florida
- only domestic when incorped in Florida
- foreign corporation must incorp with the state of Florida before doing business in Florida
- If it fails to do so, it cannot sue in Florida courts
OTHER BUSINESS ENTITIES AND TERMINOLOGY:
Tax
- For tax purposes, a corporation is by default a “C” corporation, which means that it is taxed as a corporate entity.
- Under some circumstances, a corporation may elect to avoid this “double taxation” and choose to be taxed like a partnership; if it does this, it becomes an “S” corporation.
- To qualify for this “pass through” status, a corporation can have no more than 100 shareholders, and the shareholders may include only individuals, estates, and and a handful of entities that are not a corporation.
- Corp may not have more than 1 class of stock.
*
OTHER BUSINESS ENTITIES AND TERMINOLOGY:
Limited Liability Companies (LLCs)
- LLC ‘s operation & agreements among owners & managers, is generally more flexible than corps.
- Member of LLC typically not liable for debts of LLC.
- Manager of LLC typically not liable for debts of LLC.
- By default, members of LLCs share profits and losses in proportion to their contributions to the LLC
- Sale or other assignment of an LLC membership typically does not give transferee a right to participate in the management of an LLC.
- Ex: While studying, focus on rules that are definite in the statute.
CORPORATE STOCK AND SECURITIES:
Issuance
- Must a corporation issue all the shares that its articles of incorporation authorize? _______.
- By default, Directors determines whether consideration for issued shares is adequate
-
Pre-incorporation subscription (must be in writing) for shares is irrevocable for 6 months
- Exceptions: Parties can agree to longer or shorter periods of time; All subscribers can release each other
- If a subscriber defaults, corp has the right to:
- Attempt collect $$$ from subscriber; OR
- Sell shares to another & recover difference
CORPORATE STOCK AND SECURITIES:
Distributions
transfer by corp to SHs of $$$ or property
- Dividend most common type; may be cumulative, noncumulative, or partially cumulative
- Record date: If board of directors does not decide on a dividend record date, date will be date directors issue dividend
-
Corp may not make distributions if:
- unable to pay the debt that arise in the usual course of business (broader test); or
- would immediately cause corp to have less $$$ than its current debts (more specific test).
CORPORATE STOCK AND SECURITIES:
Distributions:
Some classes of shares may have priority in receiving distributions. These shares are called?
preferred shares, as opposed to common shares.
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Priority of claims upon liquidation of the corporation:
- Creditors
- preferred shares
- common shares
