Corporations Flashcards
Master corporations for the California bar
Formation - statement of purpose - consequences of ultra vires act
- Valid as to third parties
- Shareholders can seek injunction to stop
- Corporation can sue responsible managers for losses
Formation - forms of corporation if incorporation fails
De facto corporation
- Relevant incorp. statute exists (always does)
- Parties made a good faith, colorable attempt to comply with the statute, AND
- 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.
- Applies only in contract cases, not tort cases (tort creditors not choosing to deal with corporation)
Formation - pre-incorporation contracts - promoters
Promoter is person acting on behalf of corp not yet formed; may enter into K on behalf of such corp
Liability of corporation: not liable on pre-incorporation K until it adopts
- Express: board takes action adopting (e.g., resolution)
- Implied: corporation accepts the benefits of the contract. (e.g., can accept lease by moving in)
Liability of promoter: unless K clearly provides otherwise, liable on pre-incorporation Ks until there is a novation
Formation - pre-incorporation contracts - promoters - duties
Promoters are fiduciaries of each other and corp; cannot make secret profit on dealings w/ corp
- Sale to corp of property acquired by promoter before becoming promoter: profit recoverable by corp only if sold for more than FMV
- Sale to corp of property acquired by promoter after becoming a promoter: any profit recoverable by corp
Issuance of stock - subscription
Subscription
- Written offer to buy stock from corporation
- Pre-incorporation subscriptions are irrevocable for six months
- Post-incorporation subscriptions are revocable until acceptance by board
Issuance of stock - articles
Articles must include: authorized stock, number of shares per class, and information on voting rights and preferences of each class.
- Authorized stock: maximum number of shares the corporation can sell.
- Issued stock: number of shares the corporation actually sells.
- Outstanding stock: shares that have been issued and not reacquired.
Issuance of stock - par value and consideration
- Par value means the minimum issuance price.
- Sale of par value stock
- Any valid consideration may be received if Board values it in good faith to be at least par value.
- E.g., money paid, labor done, property received, tangible or intangible property or benefit
- Some states also allow promissory notes, future services
Issuance of stock - treasury stock
Treasury stock is stock the company issued and then reacquired; board sets a price for reselling
[CK: liable for below par price?]
Issuance of stock - preemptive rights
- Right of an existing shareholder to maintain same percentage of ownership by buying stock whenever there is a new issuance of stock for cash
- In most states, no preemptive rights unless expressly in articles.
Issuance of stock - watered stock
Watered stock is par stock sold below par
- Directors are liable for water (difference between par value and purchase price) if they knowingly authorized the issuance
- Buyer is liable.
- Third-party transferee of buyer is liable only if she knew about water
Directors - overview
- Board must have at least one member
- Shareholders elect directors every year or staggered every 2/3
- Shareholders can remove with or without cause by majority of shares entitled to vote
- Board vacancy may be filled by other directors or shareholders (only shareholders if they vote to remove)
Directors - action
Need meeting unless all directors consent in writing to act without a meeting
Each director is presumed to have concurred in board action unless absent or dissent/abstention is recorded in writing
Directors - meeting - notice
- Regular meetings: no notice required
- Special meetings: notice must state the time and place of the meeting but does not have to state the purpose
Failure to give required notice voids action at meeting, unless directors not notified waive defect, either in writing or by attending the meeting
Directors - meeting - quorum and voting
Quorum
- Must have a majority of all directors to do (unless different percentage set in bylaws)
- Quorum can be lost (“broken”) if people leave; board loses ability to act
Voting
- If a quorum is present, passing a resolution requires majority vote of those present
- Directors cannot give proxies or enter into voting agreements
Directors - duties - care
Duty to show breach is on P. Requires:
- Good faith
- Due care of ordinarily prudent person
- Best interest of corporation
- Business Judgment Rule: a court will not second-guess a business decision if it:
(1) was informed,
(2) was made in good faith,
(3) was made without conflicts of interest, and
(4) had a rational basis.
Directors - duties - loyalty
Burden to show no breach is on D. Requires:
- Act in good faith and with reasonable belief that what she does is in corporation’s best interest
Directors - duties - loyalty interested director transaction
Deal between the corporation and one of its directors, or a close relative of a director, or another business of the director
Rescission (or damages) UNLESS:
- Deal was fair to corporation when entered OR
- Dir’s interest and relevant facts were disclosed or known and deal was approved by majority of disinterested directors or shares. (Some courts require a showing of fairness even w/ approval.)
Directors - duties - loyalty - competing ventures and corporate opportunity
Competing ventures
- Director cannot compete with corporation
- Remedy is constructive trust on profits.
Corporate opportunity (expectancy)
- Director cannot usurp a corporate opportunity
- Must (1) tell the board and (2) wait for board to reject; company’s inability to pay for opportunity no defense
- Remedy: if dir still has opportunity, must sell it to corporation at his cost; if dir has sold it at a profit, corp gets constructive trust on profits
