Corporation Flashcards
Six fact patterns in corporations law:
- Organization of a corporation; 2. Issuance of stock; 3. Directors and officers; 4. Shareholders; 5. Fundamental corporate changes; 6. Federal securities.
What are the general formation requirements of a corporation in very broad terms?
- People; 2. Paper; 3. Act
In the formation of a corporation what people are required?
Incorporators–must have more than one.
What does an incorporator do?
Execute and file the articles. Might also hold the organizational meeting.
Who can have the job of incorporator?
It can be a natural person or entity.
What paper is required for formation of a corporation?
Articles of Incorporation
What are the purposes of the articles of incorporation?
- The articles are a contract between corporation and shareholders; 2. articles are a contract between corporation and state.
What goes in the articles?
- Statement that corporation formed under the Business Corporation Law of 1988; 2. Names and addresses; Capital structure (stock).
What names and addresses need to be in articles?
- Corporate name; 2. Name and address of each incorporator; 3. Name of registered agent and address of registered office.
One of what words must be in the corporate name?
- Corporation (Corp.); 2. Company (Co.); 3. Incorporated (Inc.); 4. Limited (Ltd.); 5. Association (cannot be abbreviated); 6. Fund; 7. Syndicate (cannot be abbreviated)
Must you name the initial directors in the articles?
In Pennsylvania, it is your option. But if you do, you must give their addresses too.
If there is no statement of duration in the articles, the default rule is what?
Perpetual duration.
If there is no statement of corporate activity, what is the default rule?
All lawful activity.
How do we handle ultra vires (beyond the scope of the articles) today?
- Ultra vires contracts are valid; 2. Shareholders can seek an injunction; 3. Responsible managers are liable to the corporation for ultra vires losses.
What is Authorized Stock?
Maximum number of shares the corporation can sell.
What is Issued Stock?
The number of shares the corporation actually sells.
What is Outstanding Stock?
Shares that have been issued and not reacquired by the corporation.
What does the articles have to contain with regard to stock?
Articles must include: 1. Authorized stock; 2. information on par value (if any par shares); 3. voting rights; 4. preferences of each class of stock.
What is the act of forming a corporation?
File articles with Pennsylvania Department of State and pay required fee.
What if the Pennsylvania Department of State accepts the articles for filing?
That is conclusive proof of valid formation. At that moment we have formed a de jure corporation.
After the corporation is formed, what must happen?
The board of directors holds the organizational meeting, where they select officers and adopt any bylaws and can conduct other appropriate business. BUT if the initial directors were not named in the articles, incorporators hold an organizational meeting, where they elect directors and adopt any bylaws.
What is the legal significance of formation of corporation:
- Internal affairs of a PA corporation are governed by PA law (Internal Affairs Doctrine) even if corporation does business elsewhere; 2. A corporation is a separate legal person (it can sue and be sued, be a partner in a partnership, make charitable contributions, be taxed on its profits);
What is double taxation?
Corporation is taxed on its profits and the shareholders are taxed on distributions.
How can you form a corporation and avoid it being taxed at the corporate level?
S-corporation
Who is liable for what the corporation does?
The directors, officers and the shareholders are not liable for what the business does. The corporation is liable for what the corporation does. You are personally liable if you personally participated in wrongdoing.
In the event of a failure to form a de jure corporation, all you have is a partnership and the proprietors will be personally liable for what the business does. What are defenses for shareholders to avoid personal liability? To use these defenses the person must be unaware of the failure to form a de jure corporation.
- De Facto Corporation; 2. Corporation by estoppel
De Facto Corporation requirements:
- There is a relevant incorporation statute (there is! the BCL); 2. the parties made a good faith, colorable attempt to comply with it; 3. Some exercise of corporate privileges (acting like we have a corporation).
Corporation by estoppel:
one who treats a business as a corporation may be estopped from denying that it is a corporation. Example: you did business thinking it was a corporation, then later you try to sue the proprietors individually–estopped. Or the business tries to avoid liability by saying it was not a properly formed corporation–estopped.
Corporation by estoppel generally applies in what kinds of cases?
Contract, not tort.
What is the status of the doctrines of de facto corporation and corporation by estoppel doctrines?
May be abolished, but unsure.
Are bylaws a condition precedent to forming a corporation?
No.
What are bylaws for?
internal governance
Who adopts the initial bylaws?
Board or incorporators. Who does this depends on whether we named the initial directors in the bylaws.
Who can amend and repeal the bylaws of a corporation?
Shareholders. The board can only if the bylaws allow.
If the bylaws conflict with the articles, what controls?
Articles. Because bylaws are for internal governance and are not filed with a state agency. They are binding on directors and officers, but not binding on outsiders.
What is a promoter?
A person acting on behalf of a corporation not yet formed.
Who is liable for pre-incorporation contracts?
A corporation is not liable on pre-incorporation contracts until it adopts the contract.
How can a corporation adopt pre-incorporation contracts?
- Express (board of director action adopting the contract); 2. Implied (arises if the corporation accepts a benefit of the contract).
Liability of the promoter for pre-incorporation contracts:
Promoter is liable until there has been a novation. A novation would be an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract. So even if the corporation adopts the contract and is liable for the contract, the promoter is still liable until novation.
What is the Pennsylvania rule regarding foreign corporations?
Foreign corporations transacting business in Pennsylvania must qualify and pay prescribed fees.
What is a foreign corporation?
Anything outside Pennsylvania.
What does it mean to transact business?
Regular course of intrastate business activity.
How can a foreign corporation qualify to do business in PA?
Get a certificate of authority by giving information from articles and proving good standing in its home state. It must have a registered agent in Pennsylvania and pay fees here too.
What happens if a foreign corporation transacts business in Pennsylvania without qualifying?
- There is a civil fine; 2. It cannot assert a claim in Pennsylvania; 3. Although it can be sued and it can defend.
Once a corporation qualifies and pays back fees and fines, can it then sue in Pennsylvania?
yes
What is an issuance of stock?
When a corporation sells its own stock. It is not an issuance for somebody else to sell the stock.
Why does a corporation sell stock?
To raise capital.
What is a subscription?
A written offer to buy stock from corporation.
Are subscriptions revocable?
Yes, any time before a corporation accepts the offer to buy stock.
When do the corporation and the subscriber become obligated under a subscription agreement?
When the board accepts the offer.
With regard to consideration, what form must the consideration be in for the corporation to issue stock?
Permitted: any tangible or intangible property or benefit to the corporation. Includes money, tangible or intangible property, services done for the corporation, release of obligations, promissory notes, even future services.
What is prohibited with regard to the form of consideration for a corporation to issue stock?
Anything else–almost impossible to have a prohibited form of consideration.
Who decides if consideration is adequate?
the board–regardless of par value
What does par mean?
minimum issuance price
What does “no par” mean?
No minimum issuance price.
Treasury stock is what?
Stock that was previously issued and has been reacquired by the corporation. The corporation can then resell it at any price the Board sets.
What are preemptive rights?
The rights of an existing shareholder to maintain her percentage of ownership by buying stock when there is a new issuance of stock. Has a right to buy a certain amount of shares.
In Pennsylvania when do preemptive rights exist?
Only if the articles provide for them OR in a statutory close corporation preemptive rights exist unless the articles provide otherwise.
What is the statutory requirement for number of directors?
One or more adult natural persons.
If the articles are silent about the number of directors, how many do we have?
Three.
Who may select directors?
Initial directors can be named in the articles or selected by incorporators. Thereafter, it is shareholders at the annual meeting.
What is a classified board?
Where the board is divided by halves or thirds, with half or one third elected each year. Most states call this a staggered board.
On what bases can shareholders remove directors before their terms expire?
With or without cause. Unless it is a classified board, and then the shareholders can only remove a director for cause.
Can the board remove a director?
Yes, for cause.
Can a board remove a director for mental incapacity?
Only if there is a judicial determination of incapacity.
Who selects the person who will fill a vacancy on the board?
Usually majority vote of remaining directors.
The board of directors can only take an act in one of two ways:
- Unanimous agreement in writing; 2. At a meeting (which has to satisfy the quorum and voting requirements).
What if the directors agree to act through individual conversations, without a meeting or unanimous written agreement?
Act is void unless ratified by a valid act.
Does email count as an agreement in writing?
Yes, if the printout is kept in the records.
Does a conference call count as a meeting?
Yes.
If there is a board meeting, the method for giving notice is usually set in the bylaws. Is notice required for regular meetings? Is notice required for special meetings?
No for regular meetings. Yes for special meetings: at least five days written notice stating the time and place.
Failure to give notice for special meeting does what to whatever happens in the meeting?
Voids whatever happens in the meeting unless those not given notice waive the defect. They can do so in writing anytime or by attending the meeting without objecting to the lack of notice.
Can directors give proxies or enter voting agreements for how they will vote as directors?
No. No such thing as director’s proxies and voting agreements.
What is the rule for shareholders voting by proxy?
Shareholders can vote by proxy and by voting agreement.
What is a quorum for a meeting of the board?
A majority of all directors unless a different percentage is set by the board.
If a quorum is present at a meeting, passing a resolution requires how many votes?
Only a majority of those present.
What is a broken quorum?
Quorum of the board can be lost if people leave. Once a quorum is no longer present, the board cannot take an act at that meeting.
How can a shareholder quorum be lost?
Never can be lost.
What is the role of directors?
Manages business of corporation. (sets policy; selects and monitors officers, declares dividends; decides when the corporation will issue stock; recommends fundamental corporate changes to shareholders)
Can the board delegate substantial management functions?
To a committee consisting of one or more directors.
What functions can a committee NOT perform?
- amend by-laws; 2. fill a board vacancy; 3. submit a financial corporate change to shareholders. It can recommend these for board action.
With regard to the duty of care of a director, the burden is on whom?
On the plaintiff
