Corporation Terms Flashcards
Promoter
The promoter or incorporator is the person acting on behalf of the corporation not yet formed
Promoter Contract Liability
Corporation is NOT liable for pre-incorporation contracts between promoter and third parties unless the corporation adopts those contracts later
Types of Adoption
Express:
The BOD passes a resolution
Implied Adoption:
Knowledge of the contract between the promoter and the third party,
Corporation accepts the benefits of the contract
Novation
Promoter is liable for pre-incorporation contracts until novation
Novation is an agreement between the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract
Without BOTH novation AND adoption, the promoter remains liable
De Jure Corporation
If the contract is not formed de jure by law after the contract formation, that cannot be adopted
- If the corporation is not formed, then it cannot adopt, and this the promoter alone is liable
Acceptance v. Novation
Upon acceptance of a contract made prior to a corporate formation (by the promoter) where they accept the benefits of the contract
the corporation AND promoter are liable until novation
acceptance alone is not enough to rid the promoter of liability
Secret Profit Rule
promoters cannot make secret profits on dealings with the corporation
if you disclose making a profit and the corporation is ok paying more- that is fine
Secret Profit Rule (Promoter Property Acquired Before and After)
if the property was acquired by the promoter BEFORE becoming a promoter and then that is sold to the corporation, now the promoter has to give back anything received form the corporation over the FMV
promoter property acquired AFTER coming a promoter and then sell to the corporation, promoter has to give back anything over cost
Subscribers
persons or entities who make written offers to buy stock from a corporation that was not yet formed
Subscription Offers
(1) Written offers to buy stock from the corporation
(2) Before the issuance, you subscribe to buy their stock
(3) Pre-incorp are irrevocable for 6 months unless agreed otherwise
Post-incorp subscription offers can be revoked up until acceptance
Formation Requirements
People, Paper, Act
* note bylaws are NOT required
People Requirement
person or a personal entity signing and filing the articles of incorporation with the secretary of state
*** The modern trend is that you need just one
Paper Requirements
Articles MUST include
(1) max shares corp is authorized to issue
(2) purpose of the corp
- general
- specific
(3) name and address of at least 3 registered agents
(4) name of the corporation
Act Requirement
Act of filing the articles with the secretary of state
General Purpose of the Corporation
‘to engage in all lawful activities’ is just a general purpose presumed in the absence of a specific clause
Specific Purpose of the Corporation
specific purpose can be stated but if they aren’t stated then anything other than that purpose would be an ultra vires act
Ultra Vires Acts
Ultra Vires deals are valid but shareholders can get an injunction
directors who participate in ultra vires activities are liable to the corporation for any losses caused by the ultra vires activity
- directors and officers are unauthorized agents here and are liable as such
- if you go against the specific purpose description and the agency principals, you are an unauthorized agent because the unauthorized deals will could against the corporation but you are liable
Legal Significance of Corporate Formation
(1) corporation becomes a separate legal person
(2) internal affairs are governed by the state in which they are incorporated
(3) limited liability meaning the shield is only available for the price of the stock UNLESS you pierce the corporate veil
De Facto Corporation/Doctrine
if, for whatever reasoning, the corporation fails to meet de jure requirements, it will still be treated as if the corporation exists IF the organizers/promoters have made a good faith, colorable attempt to comply with the corporate formation formalities
*** if that is the case, apply the De Facto Corporation Doctrine meaning even though it wasn’t technically formed as a corporate entity, in the case of third party claims, you act as if the corporation was in fact created by law
—- many states require the organizers/promoters have no knowledge of their lack of formal corporation status
Corporation by Estoppel
rule of thumb that third parties having acknowledged the existence of the corporation by signing a contract with a corporation that in fact does not exist may not later deny it to gain an advantage
What must a corporation receive when they issue stock?
Consideration
Valid Forms of Consideration
Money, property, services already performed
Invalid Forms of Consideration
any FUTURE services or promissory notes
Par Value
There’s a minimum issuance price for stock
Receiving Property for Par Value Stock
Any valid consideration may be received if the board values it in good faith that would be worth AT LEAST par value
Liability for Stock issues BELOW Par Value
Directors are liable for authorizing a below bar issuance of stock because they lack to authority to do so
No Par Stock
No par means there is NO minimum issuance price for stock
Meaning ANY valid consideration may be received if deemed adequate by the board
Par Value Stock Liability for Acquiring Shareholders
Acquiring shareholder is liable to pay full consideration for shares which is at least par value
Treasury Stock
Stock that was previously issued and had been re-acquired by the corporation and later resold
The act of the corporation buying it back makes those shares treasury stock
price is the same as no par stock
– Any valid consideration any be received if deemed adequate by the board
Preemptive Rights
Rights for shareholders to keep their stock proportion/percentage of ownership by purchasing stock whenever and ONLY IF there is a new issuance of stock for cash
(1) Right of an existing shareholder
(2) to keep their percentage of ownership
(3) When there is a new issuance
(4) For cash
Shareholder Election Process and Methods
Shareholders elect directors at their annual meeting
(1) Entire election
—–when all directors are up for election in a given year (from a takeover perspective)
(2) Staggered boards
—–You can only remove one third on the board per year
When does the board meet?
at a minimum annually
Removal of Directors
Shareholders can remove directors before their term expires with majority votes, with or without cause
–> If this happens, the empty director’s slot must be filled immediately
Acting without a meeting
Unanimous written agreement is required for a board to act without a meeting
Unless all directors consent in writing to act without a meeting, a meeting is required
BOD General Meeting Requirements
Notice must be given in advance (generally mentioned in bylaws with annually or monthly)
BOD Special Meeting Requirements
Require a 2-day notice
BOD Proxy/Voting Requirements at Meetings
Proxies and Voting Requirements are NOT allowed
Directors may NOT delegate their duties
BOD Meeting Quorum to DO BUSINESS
To do business, a corporation needs a majority of directors present at the meeting
BOD Meeting Quorum to PASS A RESOLUTION
To pass resolution, the corporation needs a majority of the present directors at the meeting to vote in its favor
—-If there is no quorum (less than half show), the action taken can be ratified later by the overall board
Quorum at a BOD Meeting
Quorum can be lost if a director leaves the meeting
Unlike quorum requirements for shareholders where it cannot be revoked
Limitations for Delegation of Director Duties
(1) Default rule is you cannot delegate all their powers to a committee
(2) Committees CANNOT declare dividends
(3) Cannot amend bylaws
(4) Cannot recommend fundamental corporate changes
(5) Cannot fill a board of directors vacancy
BJR/Default Rule
The BJR is a presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders
The business judgment rule will protect its directors from liability for innocent mistakes of business judgment
—- Baseline rule is that if you act as a director, you are not liable if you meet the business judgment rule
BJR Test
(1) You must act in good faith
(2) Act in the best interest of the corporation
(3) Act on an informed basis
(4) Not be wasteful
(5) No involved self interest
BJR relevant case law
Smith v. Van Gorkum
—- The courts will refuse to review the actions of a corporation’s BOD in managing the corporation unless there is some allegation of misconduct that the directors violated their duty of care to manage the corporation to the best of their abilities
Fiduciary Duties of Directors
Duty of Care and Duty of Loyalty
Breach of Duty of Care: Prudent Care
A director owes a corporation a duty of care and must act with the care that a prudent person would use with regard to her own business
—– Burden is on the plaintiff to sue for breach of duty of care
Breach of Duty of Care: Nonfeasance/Misfeasance
Nonfeasance means the directors fails to act
—–May lead to director liability
The board of directors does something harmful
Bad business deal/decision, harmful to the corporation
—- A court will not second guess a business decision if it was made in good faith and it was reasonable and the person, the director, was reasonably informed and had a rational basis for making the decision.
Breach of Duty of Loyalty (3)
(1) Interested Director Transactions
(2) Competing Ventures
(3) Usurping Corporate Opportunities
Breach of Loyalty Ratification
If faced with a claim because of breach of duty of loyalty, they may defend themselves by obtaining independent verification through either:
(1) Majority vote of independent directors
(2) Majority vote of a committee of at least 2 independent directors
(3) majority vole of shares held by independent shareholders
Officer Duties/Obligations
we treat officers like directors for the purpose of applying the rules fiduciary obligations
officers are subject to the same duties of loyalty and care as directors
Indemnification of Directors/Officers
directors and officers may incur costs when they are sued, in the context of their role at the corporation, and because they are acting as agents and have engaged in commerce on behalf of the corporation, there are generally sued with the corporation or separately
Indemnification Types
(1) prohibited Indemnification
(2) mandatory Indemnification
(3) permissive indemnification
Mandatory Indemnification
if a director is successful in defending a lawsuit against a third party, they must be indemnified by the corporation
Prohibited Indemnification
corporation may never indemnify a director if they are held liable to the corporation
Permissive Indemnification
where the corporation either ends up liable to a third party or settles a case with a third party and the director incurs expenses in defending the lawsuit but the director or officer was acting in food faith and believed her conduct was in the corporation’s best interest, then the director MAY be granted permissive indemnification by: [§145(d)(1-4)] BY
(1) a majority of independent directors who are not parties to such action, suit, or proceeded, even though less than a quorum; or
(2) a committee of such directors designated by a majority vote of such directors, even though less than a quorum; or
(3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion; or
(4) by the stockholders. (***vote by majority of shares represented by independent shareholders)
Shareholder Voting Requirements
Baseline rule = Record Owner at record date votes
*** Record date is the voter eligibility cutoff date set by the board of directors on any day within a 70-day period leading up to the meeting
Shareholder Voter Exceptions
(1) treasury stock excluded
(2) death – executor CANNOT vote
(3) proxy voting
Shareholder Proxy Voting Requirements
(1) Writing signed by record shareholder
(2) Directed to the secretary of the corporation
(3) Authorizing another person to vote the stock on their behalf
(4) Valid for only 11 months
(5) Revocable at any time
——– UNLESS the proxy says conspicuously that it is irrevocable and the proxy’s couples with some other interest
Block Voting
Shareholders who own relatively few shares of stock decide that they can increase their influence at the annual meeting by agreeing to vote alike.
Block Voting Types
Voting Trust or Voting Agreement
Voting Trust
Formal delegation of voting power to a voting trustee
(1) Written trust agreement
(2)Copy filed with the corporation
(3) Transfers legal title to shares to the voting trustee
(4) Shareholders get a trust certificate
(5) Shareholders retain all rights except for the right to vote
(6) Generally valid 10 years unless extended by an agreement
Voting Agreement
Shareholders agree in writing to vote their shares as agreed by all parties
*** courts split in determining enforceability
Shareholder Annual Meeting Venue
Shareholders, electing directors
Generally, one meeting at the end of the FY electing new directors
Who can call a Special Meeting?
BOD can call or 10% of voting shares
*****Articles can further specify who can call a special meeting
Shareholder Special Meeting Venue
(1) Require 2-day Notice
(2) A special meeting MUST be for a proper shareholder purpose
****Must be something they can act on/pass a resolution on and in relation to the business of the corporation
Shareholder Quorum
(1) The minimum number of shares that must be represented, physical or by proxy, in order for a decision to be binding
(2) Quorum must be present at a meeting based on the number of OUTSTANDING SHARES represented, not the number of shareholders present
(3) Quorum CANNOT be lost for purposes of shareholder voting
Exception to General Shareholder Quorum Rules
they can do articles on the bar that alter the quorum requirement, meaning it can, but it can never be below one set of total outstanding stock rights
the rule is that it can never be below one third
the articles can say that one third of total outstanding loans will form a full quorum
Cumulative Voting
Allows minority shareholders to concentrate all their voting strengths on one or more individual directors with the hope that they are elected
Cumulative Voting Mechanism
mechanism for determining votes
multiply the number of shares held by respective shareholders by the number of director seats up for election
Cumulative Voting Requirements
(1) Voting for directors
(2) articles must provide for cumulative voting when (3) shareholders vote for directors
Shareholder Liability for Debts of a Corporation
General Rule: Shareholders are not liable for the debts or the corporation
Piercing the Corporate Veil
makes the shareholder liable if they abuse the privilege of a corporation and if giving limited liability would be inequitable resulting in personal liability to the shareholder
Exception to GENERAL RULE for Shareholder Liability for Debts of a Corporation
Piercing the corporate Veil
Types of Piercing
Alter Ego or Undercapitalization
Alter Ego
failure to observe sufficient corporate formalities
Undercapitalization
failure to maintain sufficient funds to cover foreseeable liabilities
Shareholder Management of Corporation
Shareholder Management of Corporation: Criterion to Upload a shareholder
The agreement that binds Directors IF
(1) no minority shareholder objects
(2) no harm to the public or corporate creditors
(3) the agreement is regarding a MINOR issue
Shareholder Derivative Suit: Nature of Claim
permit a shareholder to bring an action in the name of the corporation against the parties allegedly causing harm to the corporation
**** shareholders CANNOT sue on behalf of the corporation for their own actions
Requirements for Derivative Shareholder Suit
(1) Contemporaneous Stock Ownership
must be a record owner of stock who owns at least one share of stock that is held both when the claim arose and throughout the entire litigation
(2) Must represent the interests of the corporation/shareholder and you have to
(3) Must make a written demand on the directors that they cause their own corporation to being the suit
**the demand must be either rejected or 90 have passed since receipt
***An exception to this final requirement is if the demand would be futile meaning it is clear the directors would oppose to then action because it is a criticism of their management
Rights of Shareholders against Corporation
formerly we needed 5% of shares to inspect books and records; NOW, any shareholder shall have access at a proper time
***make a written demand stating the purpose §220(b) and then shareholder can move for a court order
Dividend Distributions
Dividends are declared by the Board of Directors at BoD’s discretion
*****exception if the corporation is insolvent or making the dividend would render the corporation insolvent
Types of Stock
- Preferred Stock
- Preferred Participating Stock
- Preferred Cumulative Stock
- Common Stock
Sources of Funds available for Dividend Payments
you can use earnings surplus and capital surplus
CANNOT use stated capital
Recognized Fundamental Corporate Changes
- Mergers
- Consolidation
- Dissolutions
- Amendments of articles
- Sales of substantially all of the corporation’s assets
Procedure of Fundamental Corporate Change
(1) the board of directors resolution and notice to all voting share is required
(2) majority of all shares entitled to vote by and a majority of any voting group that is adversary affected by the change
*** the dissenting shareholder who does NOT vote in favor of a fundamental corporate change can force the corporation to buy shares at FMV when corporation combines with another corporation AND
the corporation transfers all or most of the assets or there is a share exchange
Appraisal Rights for Dissenting Shareholders of Fundamental Corporate Change Votes
(1) before the shareholders vote, the dissenting shareholder needs to file a written notice of objection and the intent to demand payment
(2) dissenting shareholder has to abstain from voting
(3)the shareholder has to make a prompt written demands AFTER the shareholder vote to be bought out
Amendment of Articles Requirements
requires a BOD approval and notice to the shareholders AND a voting majority shareholder approval to amend the articles
***then file amended articles with the secretary of the state
Merger v. Consolidation
merger = A and B form A.
consolidation = A and B become C
Merger Requirements
require BOD approval of BOTH corporations AND notice of the shareholders AND shareholder approval.
must also file the articles of merger/consolidation with the secretary of state and the dissenting shareholder rights of appraisal for BOTH corporations
Short Form Merger
Short Form Merger
no shareholder approval is needed for short-form mergers between parents of the 90% subsidiary
Transfer of All/Most Corporate Asset Requirements
requirements of the selling
—-BOD approval
—-notice to the shareholders
—-approval by the selling corporation shareholders with a majority of shares
—-requires filing with the secretary of state
Transfer of All/Most Corporate Asset Rule
default rule here is buying corporations doesn’t succeed to selling corporation’s liabilities
—–transfer of all assets is NOT merger, and thus buying corp does not step into the shoes of the selling corporation
—–buying corp does NOT succeed the selling corp’s liabilities
Types of Dissolution
Voluntary and Involuntary
Voluntary Dissolution
(1) the original corporation requires that the BOD resolution shareholder notice and approval
——by majority of voting shareholders; OR
——unanimous fit in shareholder agreement
(2) file the articles of dissolution
(3) give notice to creditors
Shareholder Petition for Involuntary Dissolution Requirements
(1) shareholder’s can request a petition for an involuntary dissolution if there is
director abuse, waste, misconduct, illegal and oppressive acts OR
(2) shareholder failure to fill a board of directors position, OR
(3) director deadlock causing irreparable harm to the corporation
*****the corporation stays in existence to wind up and we change assets to cash and then pay creditors then shareholders
Creditor Petition for Dissolution Requirements
—-the corporation is insolvent
—-directors have an unsatisfied judgment OR
—-corporation admits to debt in writing
