Corporation

Question 1

Shareholders Fundamental Rights

Answer 1

1) Vote: Voice views of various issues, primarily by voting.
2) Sue: Litigate claims against corporation and its directors, officers, and controlling shareholders.
3) Sell: Exit the Corporation by selling shares.
4) Yell: Limited; “Activist” shareholders trying to stage some sort of campaign to elect board members.
* Trying to make interests of shareholder known directly, rather than just voting.

Rights can be limited
NO right to demand payment for their shares.
CAN transfer rights of ownership interests in corporation.

Question 2

Tax Status of Corporation

Answer 2

Treated as taxpaying entity separate from shareholders.
* Corporation itself pays taxes on business income.
Shareholders also taxed on dividends or gains in personal tax return.
* Double Taxation.
Can only write off losses up to amount of capital the invested, with losses above capital investment carried forward and recognized in future years.

Exception: S Corporation (Private)
- Elect to be taxed on flow-through basis.

Question 3

What do bylaws do and what do they typically include?

Answer 3

• Rules for how the corporation operates
• Not filed with the state
• Set out governing details of corporation
• Longer than articles of incorporation
  Include:
  o Powers of directors and officers
  o Procedures for electing directors and filling director vacancies
  o Required notice periods and details for calling and holding meetings of shareholders and directors
  o + similar internal governance issues.

Question 4

Categories for Corporate Securities

Answer 4

Equity (common and preferred shares) and Debt (Note, Bond)

Question 5

Common Shares

Answer 5

Every corporation has them.
Greater financial risk.
Claim to residual financial rights to corporation’s income and assets.
Insolvent: Common Shareholders are the last to receive payment.
RIGHT TO VOTE.

Question 6

Preferred Shares

Answer 6

Certain priorities over common stock
- Right to receive payment before common shares.
less risk than common shares, but more risk than debt.
less rights than common stock.

Question 7

Debt

Answer 7

Least risky security.
lowest expected return.
Fixed payments of interest over time.
Debt securities have priority over shareholders payment.
Ex: Bonds, Notes, Debentures.

Question 8

Authorized Shares

Answer 8

Articles of incorporation specify how many shares of common and preferred stock corporation is authorized to issue.
o Additionally issued only if articles are amended.
o Permanent number in articles of incorporation.

Question 9

Issued Shares

Answer 9

Might issue all, or just a portion, to shareholders; Often not issue all.

Question 10

Outstanding Shares

Answer 10

Portion of authorized stock that has been sold and remains in hands of stockholders in stock “outstanding”.
o Corporation can repurchase issued shared
o Issued shares - treasury shares = outstanding

Question 11

MCBA Meeting Rule

Answer 11

Board only acts with authority when assembled with board meeting.
- Don’t have to all be physically there; must be able to hear and be heard.

Question 12

MCBA Action Without a Meeting Rule

Answer 12

Action required to be taken by the board may be taken without a meeting IF each director signs a consent describing the action to be taken and delivers it to the corporation.
o Unanimous written consent.

Question 13

Requirements for Getting a Meeting

Answer 13

Notice and Quorum

Question 14

MBCA Notice for Regular Meeting Rule

Answer 14

Regular meetings may be held without notice of date, time, place, or purpose of meeting. Directors are assumed to know the schedule.

Question 15

MBCA Notice for Special Meeting Rule

Answer 15

 At Least 2 day notice of date, time, and place of meeting.
 Need Not describe the purpose.
 If you do not provide notice (if you mess this up) then any action taken at this special meeting is invalid.
 Notice can be waived – Director can sign waiver before or after meeting.
 Director can attend and participate – even if no notice; no challenge to notice when you participate.

Question 16

Quorum General Rule

Answer 16

Majority of total directors (half + 1)

Question 17

What fiduciary duties do directors and officers owe?

Answer 17

Duty of Care: Requires managers to be attentive and prudent in making decisions.
Duty of Loyalty: Requires managers to put corporation’s interest ahead of their own.

Question 18

Business Judgment Rule

Answer 18

Standard of review by courts - defer to board in corporate decisions.

Presumed direct decisions:
(1) Are informed,
(2) Made in good faith, and
(3) In honest belief that action taken is in best interest of corporation.

Question 19

For plaintiff to shift burden to directors for business decisions, what does the plaintiff have to show?

Answer 19

1. Was grossly informed,
2. Did not have a rational business purpose,
3. Was made by directors with personal or financial interest in decision, OR
4. Was made by directors who were not independent.

Question 20

Formation for Corporation

Answer 20

File Articles of Incorporation with SOS.

Process:
* Select state of incorporation.
* Reserve desired corporate name by application to SOS or other designated state office.
* Arrange for registered office and registered agent.
* Draft, execute and file certificate/article of incorporation according to requirement of state law.
* Pay filing or organization fees.

Question 21

Articles of Incorporation MUST include:

Answer 21

Name;
Number of Shares it is authorized to Issue;
Name and address of each Incorporator;
Address of the registered office;
Name of the initial registered agent at the office (for notice and service of process).

Incorporator: one or more persons may act as incorporator(s) of corporation by delivering articles of incorporation to SOS for filing.

Question 22

Articles of Incorporation MAY include:

Answer 22

Name of directors, officers, or shareholders.

Information about:
* Purpose of corporation; managing business and regulating its affairs; powers of corporation, its board and shareholders; par value for authorized shares; personal liability of shareholders in special circumstances; anything you would put in the bylaws.
* Exculpation Clause: limits personal liability of directors to corporation or shareholders.
* Indemnification Provision: obligate corporation to reimburse directors for personal liability to third parties connected with their board service.

Question 23

When is corporation formed if you start early or mess up making corporation?

Answer 23

When the articles are filed (unless you specify a delayed effective date).

IMMEDIATELY

Question 24

Who is the promoter?

Answer 24

Person who, acting alone or with others, directly or indirectly takes initiative in founding and organizing the business or enterprise.

Ex: finds investors, arranges for space/facilities, hires employees for entity, enters into contracts on entity’s behalf.

Question 25

What is promoter liable for prior to incorporation?

Answer 25

Liable for contracts entered into on behalf of a future corporation, absent contrary intent.

Contrary intent: generally requires showing more than just signing “for a corporation to be formed.”
Look at –
* Form of Signature: signed in promoters own name v. purpose noted for signature.
* Actions of 3rd Party: Look to just the former for performance or with intent of corporation to perform.
* Partial Performance: Intent to be personally liable?
* (After Incorporation): Novation

Question 26

What is promoter liable for after incorporation?

Answer 26

Promoter remains liable unless:
(1) Corporation is formed;
(2) Corporation adopts pre-incorporation contract; and
(3) Parties agree to release the promoter from liability.
 Either in initial contract or through novation.
 Novation: 3 party agreement in which a new party replaces an existing party to the contract.

For Corporation to be liable, must be novation.

Question 27

De Facto Corporation

Answer 27

Promoters get limited liability if:
 Good faith attempt at incorporation;
 Promoters unaware incorporation had not happened; OR
 Good faith use of corporate form in a transaction with third party.

Question 28

Corporation by Estoppel

Answer 28

Court prevents third party from going after promoter when third party dealt with corporation thinking there was limited liability.
 Gets promoter limited liability; happens if 3rd party assumed it was dealing with corporation.

Question 29

Under MBCA, How long can Corporation not pay fees and still be able to be reinstated?

Answer 29

2 years - must pay back fees.

If reinstated, corporation gets retroactive recognition, including LL for transaction for period that corporation was “dissolved.”

Question 30

Internal Affairs Doctrine

Answer 30

Choice of Law Rule
o Use the law of the state of incorporation to govern internal affairs of corporation.
 Relationships between owners (shareholders) and managers (directors and officers) are governed by corporate statute and case law of the state where corporation is incorporated.
 Result – confidence in the outcome, enforceability based on state rule application.
* Gives value to corporations’ choice in the state where they choose to incorporate.

Question 31

What are internal affairs?

Answer 31

What is going on among the players inside the corporation.

o Shareholder Rights: Voting rights, information rights, right to receive distributions of corporate property (including dividends)
o Managers duties to shareholders – Certain board of director decision:
 Indemnify others; Issue stock; Merge with another corporation.

Question 32

What are external affairs?

Answer 32

Generally governed by law where activities occur, and by federal/state statutes; not by state of incorporation.

Conditions of Employment of Employees, Taxes, Contrasts, Torts, Selling Property.
o Everything else corporation does in line of business.

Question 33

Characteristics of Model Business Corporation Act

Answer 33

Drafted by ABA Committee – there are about 35 states that are MBCA states.

Mirrors DE law closely, but some things relating to litigation that are different.

Question 34

Characteristics of DE Corporate Law

Answer 34

Done by Bar Committee and then passed by majority of legislature.

Offers Special Court – Court of Chancery

Largest body of precedent; Relatively stable and modern corporate law; special court for business matters with a reputation for excellence and experience in corporate law; Timely decisions.

Question 35

What are the rival states to DE in Corporate Law (Incorporation)?

Answer 35

Wyoming - Competes in Price
Nevada - More liability protection for managers, broader interests can be considered, business courts.
Texas - Business courts (just started), law is not much more lenient, but more lenient than DE, broader interests can be considered.

Question 36

What happened after the whole Tesla controversy/proposal for them to move from DE to TX?

Answer 36

DE passes amendment of law, reversing decision of Moelis.

New law allows any stockholder agreement provision, not explicitly prohibited by statute, to limit power of board/board’s exercise of statutorily granted discretion.
 Corporations can cede some governance rights to shareholders.

Allows corporations to cede some state corporate oversight to other jurisdictions.

Turned some DE mandatory rules into default rules.

Question 37

When are courts likely to pierce the corporate veil?

Answer 37

Corporation is closely held
o Individual may dominate business.

Defendant actively participated in the business
o Control and fairness.

Insiders failed to observe corporate formalities.
o Lack of corporate formalities may indicate that insiders were indifferent about corporations’ obligations to outsiders.

Insiders commingled business and personal assets.
o Commingling is like fraud.

Insiders did not adequately capitalize the business.
o Externalizes the risks; also look at insurance.

Insiders deceived creditors.
o Court perceives inequity in protecting individuals (3rd parties) who engage in deceptive conduct from personal liability.

Question 38

Why would court allow plaintiff to pierce corporate veil?

Answer 38

• If corporation does not have enough money to satisfy plaintiffs’ claims.
• Courts sometimes allow creditors to disregard the corporate entity.
• Plaintiffs get to recover directly from shareholders.

Question 39

Alter-Ego Doctrine Existence

Answer 39

Exist if: blending of identities or blurring of distinctions.

Parent must completely dominate or control subsidiary stock, finances, policies, and practices to the point that the subsidiary has no separate mind, will, or existence.

Question 40

Enterprise Liability

Answer 40

Corporation is fragment of larger combination of corporations that actually conduct one business.

Question 41

Individual Liability: Stockholder personally liable

Answer 41

Corporation is dummy for individual stockholder.

Question 42

Factors indicating Corporation is Shareholder’s Alter-Ego

(Improper Purpose Factors)

Answer 42

• Disregard of corporate formalities;
• Commingling of corporate and personal funds or property;
• Undercapitalization;
• Overlap among shareholders, officers, directors, and employees;
• Shared contact information;
• Lack of corporate discretion;
• Shareholder’s payment or guarantee of corporate debts; and
• Non-arms-length transactions between a corporation and a shareholder.

Question 43

PCV - Corporate Groups

Answer 43

Plaintiff seeks to disregard the corporate veil of a wrongdoing subsidiary to recover from its parent, or to recover from other entity or entitles related to the wrongdoer.

Question 44

Elements of Alter-Ego Doctrine

Answer 44

(1) Defendant had complete control and domination over corporation, so that corporation had no separate existence of its own.

(2) Control was used by defendant for improper purpose.
 Such as to commit fraud, violate a duty, or act dishonestly or unjustly violate lawful rights.
 Undercapitalization of corporation or failure to supply corporation with reasonably sufficient amount of money and/or insurance is considered an improper purpose.

(3) Control and breach of duty proximately cause the plaintiff’s injuries.

Question 45

Single-Business-Enterprise-Doctrine

Answer 45

Corporations that are not operated as separate entities, but instead are integrated to achieve a common business purpose, may be held liable for debts incurred toward that common purpose.

Question 46

Insider Reverse Veil Piecing

Answer 46

The individual seeks to access corporate assets for personal liabilities.

Question 47

Outsider Reverse Veil Piercing

Answer 47

third party outsider (creditor, often) seeks access to corporation’s assets to satisfy its claim against shareholder.

Question 48

Reverse Veil Piecing Factors

Answer 48

To allow RVP, need to have Alter Ego Factors present + :

(1) Degree to which allowing RVP would impair the legitimate expectations of adversely affected shareholders who were not responsible for what happened.
(2) Degree to which you are trying to disregard entity control over insider target.
* Exercised dominion and control over entity subject to claim.
* Shareholder or member who is subject to claim.
(3) Degree to which the injury alleged by the party seeking RVP is related to alleged dominion and control of the insider.
(4) Degree to which the public convenience is served by allowing RVP (articled as DGC Law).
(5) Extent and severity of wrongful conduct by corporate entity that you are trying to disregard.
(6) Unclean hands.
* Possibility that person that is seeking to RVP is themselves guilty of wrongful conduct that is sufficient to allow him equitable relief.

Question 49

Legal Capital Rule

Answer 49

Law says that you cannot bankrupt yourself to pay money to shareholders.

Must have a certain amount to be able to pay debts, prior to issuing dividends/distributions.