Corporations Flashcards
O’s powers
O’s auth to act may be actual or apparent
Express auth may be granted by stat, AOI, bylaws, or board resolution, or such power may be implied
O may have apparent auth to act where corp “holds out” O as possessing auth - 3rd pty must reas rely on “holding out”
Pre-incorporation K’s
Promoters act on behalf of corp not yet formed
Corp becomes liable when adopts K by
- express board resolution or
- implied ratification thru knowledge and acceptance of benefits
Promoters remain liable until there’s been a novation - agmt betw promoter, corp and 3rd pty that corp will replace promoter under the K
Subscribers
Persons/entities who make written offers to buy stock from corp not yet formed
Pre-incorporation subscription offer to buy stock is irrevocable for 6 months
Promoters
FD’s of each other and corp and can’t make a secret profit on dealings w/ corp
- sale to corp of prop acquired by promoter before becoming a promoter - profit recoverable by corp only if sold more than FMV
- sale to corp of prop acquired by promoter after becoming a promoter - any profit recoverable by corp
De jure corp
General purpose and perpetual duration presumed unless specific purpose and duration stated
Specific stmt of purpose and ultra vires rules
Ultra vires
Beyond the scope of the AOI
K’s
- valid as to 3rd pty’s
- SH’s can seek an injunction to stop ultra vires act
- corp can recover losses caused by ultra vires acts of D’s/O’s
De facto corp
Exists when organizers made a good faith, colorable attempt to comply w/ corp formalities and have no knowledge of the lack of corp status
Corp by estoppel
1 who treats biz as a corp may be estopped from denying later that it’s a corp
Prevents improperly formed “corp” from avoiding liability by saying it wasn’t properly formed
Limited liability
D’s/O’s/SH’s aren’t liable for what corp does
SH’s can only lose amt invested
Corp is a separate legal person
Can sue and be sued, be a partner in a p/s, make charitable contributions, etc.
Double taxation - tax on profits, SH’s taxed on distribution
S corp’s
Avoid having to pay income tax at corp level
No more than 100 SH’s, all of whom are US citizens and residents
Only 1 class of stock
Not publicly traded
Bylaws
Not req, but usually do for internal governance purposes
Board adopts initial bylaws at an organizational meeting
SH’s, and in some st’s, the board, may amend or repeal the bylaws
If bylaws and AOI conflict, then AOI controls
KSN for stock
Can be anything so long as board values it in good faith
Par value
Preemptive rt’s
Rt of an existing SH to maintain same % of ownership by buying stock whenever there’s a new issuance of stock for cash
Must be provided for in AOI
Stat req’s - D’s
Board must have at least 1 member
SH’s elect D’s at annual meeting
SH’s can remove w/ or w/o cause by maj of shares entitled to vote
Board vacancy may be filled by other D’s or SH’s - if SH’s created the vacancy by removing a D, SH’s generally must select the replacement
Effective board axn
Board can only act in 1 of 2 ways
- unanimous agmt in writing or
- meeting
Meeting
No notice req for regular meetings
Notice req for special meetings - must state time and place, doesn’t have to state purpose
Need quorum - must have maj of all D’s to take axn, unless a diff % req in bylaws
Maj of quorum wins - voting agmt’s and proxies aren’t allowed
Each D is presumed to have concurred in board axn unless dissent or abstention recorded in writing
D’s duty to manage corp
Board manages biz of corp
Sets policy, supervises O’s, declares distributions, determines when stock will be issued, recommends fundamental corp changes to SH’s
D’s may delegate
Mgmt functions to a committee of 1 or more D’s that recommends axn to the board - committees can’t fill board vacancies or declare dividends
FD
Duty of care
Duty of loyalty
Duty of care
D’s must perform in good faith in the best interest of the corp, exercising the care an ordinarily prudent person would use w/ regard to his own biz
BJR
Business judgment rule - BJR
Duty of care - doesn’t apply to duty of loyalty
Presumption that D’s manage the corp in good faith and in the best interests of the corp and its SH’s
D isn’t liable
- a ct won’t 2nd guess a biz decision if
–> was informed - did board do appropriate homework before making the decision/analyze info/deliberate?
–> was made in good faith
–> made w/o COI, and
–> had a rational basis
Duty of loyalty
D must not rec an unfair benefit to the detriment of the corp or its SH’s, unless there has been material disclosure and independent ratification
Self-dealing
D can’t compete w/ the corp
Corp opportunity doctrine
Self-dealing - interested D transaxn
D breaches his duty of loyalty when he rec’s an unfair benefit for himself (or relative, or another of his biz’s) in a transaxn w/ the corp
OK if either
- fair to corp when entered into or
- if approved, after full disclosure of material facts, by a vote of the disinterested D’s or shares
Some ct’s req a showing of fairness even if disinterested D’s/shares approve
Remedy is rescission
D can’t compete w/ corp
Remedy is CT on profits
Corp opportunity doctrine
D breaches his duty of loyalty when he rec’s an unfair benefit by usurping for himself an opportunity which the corp would have pursued
D can’t take a corp opportunity until
- tells board about it and
- waits for board to reject
Corp’s financial inability to pay for opportunity isn’t a defense
Remedies are damages, CT or corp gets opportunity at cost
Ratification
D’s may defend a claim by obtaining independent ratification thru
- maj vote of independent D’s - there must be a quorum/maj of the board in order for board to act
- maj vote of committee of at least 2 independent D’s or
- maj vote of shares held by independent SH’s
No indemnification allowed
Corp is barred from indemnifying when D is liable to corp or held to have rec’d an improper personal benefit
Mandatory indemnification
Corp must indemnify D if successful in defending, on the merits or otherwise
Permissive indemnification
Corp may indemnify for anything not satisfying no indemnification or mandatory indemnification - ex. case against D settles
D must show that he acted in good faith w/ reas belief that his axn’s were in the corp’s best interests
Disinterested D’s/shares/independent legal counsel determine eligibility
SH’s
Don’t manage the corp, board does
Can run corp directly in a close corp
Generally, aren’t liable for acts/debts of corp
Close corp
Small # of SH’s
Stock isn’t publicly traded
If no board, bc eliminated by SH’s, then managing SH’s owe FD’s of care and loyalty to corp
Controlling SH’s owe FD’s not to oppress each other, especially minority SH’s
- can’t sell control to looters - w/o reas investigation of the B
- if there’s oppression, a harmed minority SH can sue the controlling SH who oppressed her - minority SH’s have no way out bc there’s no mkt for stock
Piercing the corp veil
Only in close corp’s
Done in order to avoid fraud or unfairness
Holds SH’s personally liable bc SH’s abused privilege of incorporating and fairness req holding them liable
Alter ego theory
Undercapitalization
Fraud
More likely to be done for tort victim than for K victim
Alter ego theory
Corp veil may be pierced when there’s a failure to observe suff corp formalities
Undercapitalization
Corp veil may be pierced when there’s a failure to maintain suff funds to cover foreseeable liabilities
Fraud
Corp veil may be pierced when nec to prevent fraud or prevent an individual from using the corp to avoid existing personal obligations
Derivative suits
SH sues to enforce corp’s c/a, not his own
- ask - could corp have brought this suit? if so, then prob derivative, if not, then prob direct
1. contemporaneous stock owner
2. adequate rep’n of corp’s interest
3. written demand - may not need to demand if it would be futile
Remedy goes to corp, not SH
Direct suits
SH enforcing SH rt’s
Remedy goes to SH, not corp
Annual meeting
Must be properly noticed
Elect D’s
If none held in 15 mnths, SH can petition ct to order meeting
Special meeting
Called by board, pres or 10% SH’s
Vote only on proposals or fundamental corp changes
Notice - state time and place, must contain special purpose or else not heard
Effective SH axn
Quorum nec
Quorum req maj of outstanding shares when meeting begins, UOA provided in AOI
Proxies
- written
- signed by record SH
- directed to corp secretary
- auth another to vote
Valid for 11 mnths
Revocable unless conspicuously made irrevocable and coupled w/ an interest
Pooling agmt’s
Written agmt to vote shares as req in agmt
Binding and enforceable
No time limit
Voting trusts
Formal written agmt delegating voting power to a ttee
On file
Expires in 10 yrs
Cumulative voting - multiply # of shares X # of D’s to be elected, must be granted in AOI
Dividends
SH’s have no rt to dividends
Inspection rt’s
SH’s may only inspect records, books, SH lists, etc.
Any SH shall have access upon notice and at proper times
SH liabilities
SH’s generally aren’t liable for corp obligations
Exceptions
- PCV
- controlling SH’s owe FD’s to minority SH’s
- controlling SH’s liable for selling corp to a looter, unless reas measures were taken to investigate
Fundamental corp changes
Extraordinary, so board can’t do them alone - mergers, sale of assets, amendment of AOI, dissolution and liquidation
- board axn adopting resolution of fundamental change
- board submits proposal to SH’s w/ written notice
- must get SH approval - maj of SH’s entitled to vote
Dissenting SH rt of appraisal - fundamental corp changes
Rt to force corp to buy stock for fair value
Triggered by - merger or consolidation, xfer of substantially all assets not in the ordinary course of the biz, or xfer of shares in a share exchange
Not available if stock is listed on nat’l exchange or has more than 2K SH’s - rt only exists in close corp
SH’s only remedy for these changes, absent fraud
Mergers
Surviving corp succeeds to all rt’s and liabilities of the constituents - successor liability
Sale of assets
If sale, lease or exchange of substantially all of the corp assets is outside the ordinary course of biz, then maj of D’s and maj of shares entitled to vote must approve
- fundamental corp change for selling corp only
- appraisal rt’s for selling corp only
Amendment of AOI
Board axn and notice to SH’s
SH approval - maj of shares entitled to vote
No SH rt’s of appraisal
Voluntary dissolution and liquidation
Board axn and approval by maj of shares entitled to vote
Corp stays in existence to wind up
Notify creditors so they can make claims
Involuntary dissolution and liquidation
Ct order
SH can petition bc of
- D abuse, waste of assets, misconduct
- D deadlock that harms the corp or
- SH’s have failed at 2 consecutive annual meetings to fill a vacant board position
Alternatively, ct might order buyout of objecting SH, especially in a close corp
Wind up/liquidate
Gathering all assets
Converting to cash
Paying creditors
Distributing remainder to SH’s, pro rata unless there’s a liquidation preference
Fraud
False stmt Material fact Scienter - intent to deceive Reliance Damages
Misrepresentation
Misrep'n by ∆ Scienter - intent to deceive Intent to induce reliance on misrep'n Causation Justifiable reliance Damages
10b5
Private π must show
- fraudulent conduct - false stmt or omission to state a material fact
- materiality - something a reas investor would consider imp in making a decision to buy or sell
- scienter - pty must have knowledge that stmt was false or have an intent to deceive
- in connection w/ purchase or sale
- in IC - using phone, mail or some other instrumentality in IC
- reliance
- damages
Insider trading - 10b5
- person must be an insider
- purchase/sale of stock in IC
- based on non-public info
Tipper liability - 10b5
If an insider gives a tip of inside info to someone else who trades on the basis of the inside info, tipper can be liable under 10b5
- tipper must be an insider or w/ FD obligation to corp
- tipper must have an improper purpose
- tipper must rec some personal gain - $ or reputation or giving a gift
Tippee liability - 10b5
- tipper breached
- tippee knew that tipper breached
- purchase/sale in IC by tippee
Misappropriation
Brought by gov’t
- misappropriated info from any source
- in breach of duty of trust and confidence owed to the source of the info
16b
Derivative claim
1. large corp - traded on nat’l exchange or 500+ SH’s and $10M in assets
2. ∆ is O, D, or 10% SH’s (before and after sale)
3. purchase and sale of stock w/in 6 mnth period - highest sales are matched w/ lowest purchases
No defense
