Corporations Flashcards
Who owns a corporation?
Shareholders
Who is in charge of management of corporation?
Board of Directors
Who elects the BOD?
Shareholders
Who does the BOD appoint to carry out its policies?
Officers
What are the 3 reqs to form a corporation?
- A person
- A paper
- An act
Formation req 1: Person
Incorporator, must have one or more. Executes articles and delivers to SOS. Can be a person or an entity.
Formation req 2: Paper
Articles of incorporation including (1) name of corporation; (2) name and address of each incorporator; (3) Registered agent and street address of registered office; (4) Info regarding max number of shares of stock corp can sell
Formation req 3: Act
Incorporators notarize articles and deliver to SOS/pay fees. If SOS accepts, corporation formed.
Organizational meeting after corp formed
BOD appoint officers and adopt initial bylaws
Bylaws
Internal doc, not filed with SOS. Articles get priority over bylaws. BOD or shareholders can adopt or amend bylaws. Either articles or bylaws can set the vote required to pass a proposal at a meeting, but if both do, articles trump.
The law of what state governs internal affairs of corp?
State of inc.
B corp
Corp with benefit to broader social policy cause, has to say this in articles
How can a corp avoid payin g income tax on its profits and then shareholders being taxed (double taxation)?
Be an S corp: no more than 100 shareholders, all human U.S. citz or residents, one class of stock not publicly traded.
Are shareholders/BOD/officers personally liable for debts, breach of contract, tort?
No. Shareholders only liable to pay for their stocks. Neither are BOD or officers. Corporation itself is liable.
What happens if propietors thought they formed a corp but failed. Who is liable for debts/liability?
Partnership and partners are personally liable bc they formed a partnership.
How do partners who thought they formed a corp escape liability? (2)
- De facto corporation
- Corporation by estoppel
But these doctrines have been abolished in many states
De facto corporation
- Relevant incorporation statute
- Parties made good faith attempt to comply
- Have exercised corporate privileges (I.e. have actee like a corp)
Corporation by estoppel
When u do business with people who hold corp out as corp and you think it’s a corp. You find out it’s not and sue proprietors individually–you can’t win. This only applies in contract, not in tort
What if promotor enters into contract on behalf of corp not yet formed? Is corp liable? Is promotor liable?
ONLY if it adopts the contract expressly by BOD or impliedly by corp accepting a benefit of the contract.
Promotor is liable unless there is a novation.
Foreign corporations reqs
Any corp outside of state transacting in state must qualify and pay fees. Occasional or sporadic activity doesn’t qualify. If violate, civil fine and cannot assert a claim in the state.
What’s it called in when corp borrows money from X and agrees to repay with interest?
Bond. Owner is a creditor, not an owner/shareholder.
What’s it called when corp sells ownership interest to X?
Stock. Stockholder is an owner, not a creditor.
What is a written offer to buy stock from a corporation called?
Subscription
Pre-incorporation subscription, how long is it irrevocable?
6 months
Post-incorporation subscription, irrevocable?
Yes, until accepted by corp
What must corp receive when it issues stock?
Consideration (not just $)
Par?
Minimum issuance price of the stock. Can sell for higher.
No par?
No minimum stock issuance price. Can have stock issued for whatever price it sets.
Treasury stock
Stock issued then reacquired. Can resell it
If corp issues stock in exchange for prop or services, who decides who much to value those?
BOD
Watered stock
Corp issues 10000 $3 shares for $22,000. BOD is liable if they knowingly authorized, buyer is liable (no defense). Person who buys it off buyer not liable if did not know about water
Preemptive right
Right of existing shareholder to buy newly issued stock WITH MONEY to maintain her percentage of ownership. Only happens if articles provide for preemptive rights.
How many directors must there be?
One or more
How are directors chosen?
Either in articles or elected by incorporators at organizational meetings. After that, shareholders.
How often is board elected?
Each year unless it is staggered (in the articles)
Who can remove directors before their terms expire? Do they need cause?
Shareholders. With or without case.
in some states w/ staggered board, can only remove w/ cause
If vacancy on the board, who selects fill in?
Board or shareholders, unless shareholders removed the director. Then shareholders must select replacement.
Is an individual director an agent of the corporation?
No. Board must act as a group.
- Unanimous agreement (writing, over conference call phone, email, but has to be all together, can’t be separate convos). Can’t vote through proxies or make voting agreements bc of fiduciary duties.
What kind of notice required for regular or special meetings?
Regular: No notice
Special: Yes (two days notice of date/time/place, don’t need purpose)
How many BODs must be present for a meeting?
Quorum (majority) unless bylaws say otherwise. Only have to have a majority of those PRESENT. Can’t take action if people leave.
The board can delegate to a committee of one or more directors, but committees can’t…
Declare a distribution, fill a board vacancy, recommend a fundamental change to shareholders, but can recommend such actions tot he board
Fiduciary duties and their definitions:
- Duty of loyalty: Discharge duties in good faith and reas belief that actions are in corps best interest
- Duty of care: Use care that a prudent person in the same position would think appropriate under the circs
Two violations of duty of care + who has the burden:
- Nonfeasance (does nothing/lazy ONLY IF causes loss/harmed corp)
- Misfeasance (makes decision that hurts the business)
Plaintiff has the burden to show.
Duty of loyalty (conflict of interest)
BJR doesn’t apply. Burden is on the Defendant.
- Self-dealing (director makes deal w/ corp that benefits her). Deal will be set aside UNLESS director shows deal was fair to corp OR her interest was disclosed AND deal was approved by either majority of disinterested directors or a majority or disinterested shareholders (still has to act in best interest of corp/provide all info)
- Directors that waste assets giving themselves excessive compensation. Must be reasonable and in good faith. Can give loans to BODs if reasonably expected to benefit corp.
- Competing ventures: Director can’t compete directly w/ corp or corp gets constructive trust on profits
- Corporate opportunity: Director can usurp a corporate opportunity unless tells BOD about it and waits for BOD to reject
Which BODs can be liable?
Presumption director concurs w/ board unless dissent or abstention noted in writing in corp records, absent from the meeting (sick), or was made in good faith reliance on officer, employee, committee, professional
What duties of care do officers owe?
Same duties of loyalty and care, but they are AGENTS of the corp (unlike BOD)
Who selects/fires officers?
Board, not shareholders
Director/officer sued: When is indemnification appropriate?
- CANNOT indemnify officer held liable TO corp or who received improper benefit
- MUST indemnify when successful in defending on merits or otherwise
- MAY indemnify if shows acted in good faith w/ reas belief that what she did was in corps interest
When can shareholders run a corp instead of BOD?
In a close corporation (few shareholders, stock not publicly traded). Must:
- Put in articles and all shareholders approve OR
- Unanimous written agreement of shareholders
What fiduciary duties owed in SMA (shareholder managed agreement) close corp? To whom?
Duty of care and loyalty. Owed not just to corp but to other shareholders bc kind of like a partnership
When can minority shareholders sue controlling shareholders?
When they breach their fiduciary duty, deny minority voice in corporate affairs, fire them, refuse to declare dividends, refuse to buy minority stock
What is a P.C. or a P.A.?
Professional corporation or association. Made for licensed professionals like lawyers, medical professionals, CPAs. usually directors, officers, and shareholders must be those professionals.
Can shareholders be held liable for corporate debts?
No, corporation is liable. But court might PCV and see which shareholders are personally liable (usually in close corps)
To PCV and hold shareholder liable, must:
- Have abused privilege of incorporating and
- Fairness must require liability
Usually bc of fraud or unfairness, not sloppy administration.
When might PCV?
- Alter ego (shareholder treats corporate assets as own, abuses them)
- Undercapitalization (nuclear waste corp that doesn’t carry insurance/has very small amount of capital–usually applies to tort, not contract)
What is a derivative suit? Who gets money if wins?
When an SH sues to enforce corps claim, not own personal claim. Only applies if corp could have brought own suit. (ex: Suit against BOD). Corp gets money if wins, but SH gets attorneys fees (not if loses)
What are reqs to bring derivative suit?
- Stock ownership or receipt through operation of law
- P provides adequate rep of corps interest
- P makes written demand to corp that it bring suit (usually required unless demand would be futile I.e. is against the board)
- Corp joined as a defendant
- Corp can move to dismiss if not in corps best interest
Definition of outstanding stock?
Stock company has issued and not reacquired.
What shareholders can vote?
Usually one vote per share of outstanding stock. But must be record shareholder of the stock as of record date of vote.
SH voting: Exceptions to record holder/record date req
- Corp requires stock before record date
- Death of shareholder (SH’s executor can vote)
- Vote by proxy (if sends writing to corp saying it’s okay)–only good for 11 months unless otherwise stated, must revoke by writing too (can always revoke even if originally say it’s irrevocable unless there’s an interest like an option–can revoke by showing up)
- Voting trust (10 year max), create agreement how shares will be voted between SH’s/Voting agreements
Where do SHs vote?
Meeting (can be by email)
What are the two kinds of SH meetings?
- Annual (required) where they elect directors
2. Special (called by BOD, pres, SH of 10% shares, anyone auth in bylaws)
Notice for SH meeting
Must send written notice 10-60 days before w/ date/time/place. For special meetings, must also state purpose and CAN’T do anything else @ meeting. If don’t do, action at meeting void unless defect waived by those not available
What do SHs vote on? How many votes req?
- Elect directors (plurality)
- Remove directors (maj of shares entitled to vote)
- Fundamental corporate changes (see later flashcard)
- Other matters (maj of shares that actually vote)
How many SHs are required to vote? Can quorum be lost if SH leaves?
Quorum of SHARES (not SHs). Quorum can’t be lost if SH leaves.
When are stock transfer restrictions OK?
When they are reasonable. Right of first refusal ok.
If violate a stock transfer restriction?
Can be enforced against transferee if restriction conspicuously noted on stock certificate or transferee had actual knowledge.
Which SHs can demand access to inspect/copy the books and records of corp?
ANY shareholder or their agent. For non-controversial requests, just request. For controversial things, must state a proper purpose for the demand (board meetings, accounting records, records of SHs). BODs have unfettered access to everything.
What are the different types of distributions a corp makes to its SHs?
- Dividend
- Repurchase SHs stock
- Redemption (forced sale to corp)
When do SHs have a right to a divided
When board declares it. SH usually can’t force BOD to.
Which SHs get dividends?
- If common stock, divided equally
2. If preferred stock, divide that out at preference rate then divide common stock evenly
What are the 5 fundamental corporate changes?
- Amend the articles
- Merge or consolidate into another company
- Transfer substantially all assets (75 percent)
- Convert to another form of business
- Dissolve
How does corp make a fundamental corp change?
- Board action adopting resolution
- Board submits to SHs with written notice
- SHs vote (maj of shares entitled to vote)
- Usually deliver doc to SOS
When can SH force corp to buy stock for fair value bc of a fundamental corp change? (right of appraisal)
ONLY IN CLOSE CORPS. If you don’t like change in public corp, just sell your stock.
- Merging or consolidating
- Transferring subst all assets
- Stock being acquired in a share exchange
- Conversion to another form of business
How can SH perfect a right of appraisal?
- Before SH vote, file written notice of objection/demand payment
- Abstain from vote and
- After vote make written demand to be bought out
When can a shareholder petition for involuntary dissolution of corp?
- Director abuse, waste, misconduct
- Director deadlock that harms corp OR
- SHs fail at consecutive annual meetings to fill BOD vacancy
In close corp, instead of dissolving, court might order buyout of objecting SH
When can a creditor petition for dissolution of corp?
- Corp is insolvent and he has an unsatisfied judgment
2. Corp admits the debt in writing
Steps taken to dissolve
- Written notice to creditors/publish notice of dissolution
- Gather all assets
- Convert assets to cash
- Pay creditors and
- Distribute remaining sums to SHs
Business Judgment Rule
Director’s decision may not be challenged if director:
(1) acted in good faith
(2) with the care an ordinarily prudent person would exercise in a like position
(3) in manner reasonably believed to be in best interest of corp
Can a corp’s articles eliminate BOD’s personal liability for damages to SHs or corp?
YES.
Exceptions:
- Received a benefit to which not entitled
- intentional harms to corp or SHs
- Intentionally committed crime
- Approved unlawful distributions
