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Corporations Flashcards

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1
Q

What is a corporation?

A

A distinct legal entity that can conduct business in its own right.

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2
Q

Benefits of a corporation:

A
  1. Limited liability: Members not personally liable.

2. Promote investment

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3
Q

3 major groups in a corporation:

A
  1. Shareholders
  2. Directors
  3. Officers
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4
Q

Who are the shareholders?

A

Investors that provide money or labor, and in exchange get equity/stock/shares which rep a residuary interest in corp.

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5
Q

Who are the directors?

A

Directors of the board, elected by shareholders, resp for major decisions of corp. They also appoint the officers.

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6
Q

Who are the officers?

A

Run the corporation on a daily basis.

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7
Q

What are promoters? Do they act as fiduciaries?

A

People who try to find investors for a corp. People who enter into contracts on behalf of corp even before it exists.

They are fiduciaries (cannot make secret profits).

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8
Q

Are corporations liable for pre-incorporation agreements?

A

Generally no. Promoters are before corp exists.

Exception: Novation shifts liability from promoter to corp. Novation = agreement btw promoter, corp and third party.

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9
Q

What do the incorporators do?

A

Sign and file articles of incorporation.

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10
Q

Are incorporators liable for contracts formed by promoters?

A

No

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11
Q

What are the articles of incorporation?

A

Corp’s constitution. The contract btw corp and shareholders that establishes basic rights in these groups. And the contract btw state and corps.

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12
Q

What is listed in the articles of incorporation?

A
  1. Name (which must include “corporation, company, incorporated, limited, corp, co, inc, or ltd”)
  2. Agent (and address) within state of incorp
  3. Incorporators and name and address
  4. Duration (usually just perpetual)
  5. Purpose (not always required)
  6. Authorized shares: max number of shares of each class of stock
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13
Q

What is ultra vires?

A

Acts beyond powers of corp

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14
Q

What happens if corp acts ultra vires?

A

Could be held unenforceable

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15
Q

Can the creditor of a corp challenge the corp’s acts as ultra vires?

A

No

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16
Q

The moment of incorporation is when…

A

the limited liability attaches, which is when SoS accepts the fee and files the articles of incorporation.

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17
Q

What are a corporation’s bylaws?

A

They set forth day-to-day rules of corp.

Easier to amend than articles of incorporation.

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18
Q

Who can change the bylaws? Who can change the articles of incorporation?

A

Board of directors; shareholders

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19
Q

If bylaws conflict with articles, which wins?

A

Articles always

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20
Q

What is a de jure corp?

A

When all statutory reqs for incorp have been satsifed

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21
Q

If not all statutory reqs for incorp are met, what do we have?

A

Might be a de facto corp nonetheless.

Still treated as corp if:

  1. Organizers made a good faith effort to comply with incorp process and
  2. Have no actual knowledge of defect with incorp process
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22
Q

Are bylaws needed to incorporate a business?

A

No

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23
Q

What does it mean to pierce the veil?

A

Court may pierce veil of limited liability to avoid fraud or unfairness, meaning they may reach beyond corporation itself into members’ personal assets to satisfy the judgment.

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24
Q

General rule about shareholder liability:

A

Not personally liable, but may be liable for what they invested.

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25
Q

When does piercing the veil possibly arise?

A
  1. Alter ego: Investor or shareholder has failed to observe any of the corp formalities between person and corp.
  2. Undercapitalization: Failure to maintain funds in the company sufficient to cover business’s foreseeable liabilities.
  3. Fraud: If parties engaged in fraud or fraud-like behavior.
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26
Q

When are courts more likely to pierce the veil–in torts or contracts, when smaller or bigger corp?

A

In torts (as opposed to contracts).

And when smaller corp (as opposed to bigger one).

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27
Q

What is stock?

A

The rep of ownership in a company (aka: shares, equity)

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28
Q

What does stock typically carry?

A
  1. voting attributes

2. economic rights

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29
Q

What is a creditor and what are they entitled to?

A

Creditors hold the debt of a corp and are entitled to repayment of the loan + interest.

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30
Q

What are stockholders entitled to?

A

All value that remains after all debt has been repaid (to creditors).

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31
Q

What is preferred stock?

A

Has pref over common stock wrt dividends (money paid out to stockholders) and liquidation (business ended and money leftover distributed).

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32
Q

How many diff classes of stock can a corp have?

A

Unlimited

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33
Q

“Issuance of stock” means…

A

Sale of stock of corp to investing public

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34
Q

Authorized shares is…

A

The max number of shares directors can sell.

Must be set forth in articles. Must amend those via vote of shareholders to go higher.

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35
Q

Issued shares are…

A

The number taken out of authorized pool that directors have actually issued.

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36
Q

Outstanding shares are…

A

Shares once issued to shareholders and still in possession of shareholders.

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37
Q

Treasury shares are…

A

Shares previously issued to shareholders but reacquired by corp.

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38
Q

Usually only ___ shares are voted?

A

Outstanding

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39
Q

Par value rule

A

Corp may but is not required to issue stock at par value. If it does, it needs to sell those shares for at least the min par value listed.

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40
Q

What kind of consideration can corp receive?

A

Any valid consideration that board deems adequate.

Can be cash, labor, IP, etc.

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41
Q

Watered stock means…

A

If corp sets par value amount and sells it for less, stock has been watered by that amount.

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42
Q

Who is liable for watered stock?

A

Shareholders who bought watered stock are liable to creditors of corp.

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43
Q

What is a subscription to stock?

A

Agreement in advance to pay for stock.

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44
Q

How enforceable is a subscription agreement?

A

Irrevocable for up to 6 months.

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45
Q

What are preemptive rights? What is the default rule around them?

A

Right to acquire stock that maintains your percentage of ownership any time new shares are issued.

Default rule: shareholders do not have this right, but can negotiate for these rights or include in articles

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46
Q

How do you distribute money from a corp?

A
  1. Board can issue a dividend
  2. Board can buy back shares of corporation

Can only be authorized by board.

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47
Q

What is a dividend in kind?

A

Assets of company?

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48
Q

Do shareholders have rights to dividends?

A

No

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49
Q

When can board NOT declare dividends?

A
  1. If corp is insolvent (already in bankruptcy)

2. If by issuing it, it would become insolvent.

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50
Q

Directors who vote to authorize unlawful dividends are…

A

Personally liable (jointly and severally) to the corporation for the amount of the distribution in excess of the lawful amount.

Defense: If director relied in good faith on financial statements.

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51
Q

Formulas for how to distribute a dividends (priority order):

A

Dividend $ / # of shares

If there is preferred stock: # of preferred stock x $ dividend pref, then use remaining to calculate $ for common shares based on basic formula.

If participating preferred shares: # of preferred stock x $ dividend pref, then use remaining to calculate $ for common shares PLUS PARTICIPATING SHARES based on basic formula.

If cumulative preferred share: You do the preferred stock formula but add the years that they didn’t get paid too before calculating for common shares.

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52
Q

When can shareholders sell their stock?

A

Generally, shareholders can sell their shares to anyone at any time for any price they agree on (free alienation).

Exceptions:

  1. Closely held corps
  2. Fed securities laws restrictions
53
Q

What is a closely held corp (vs. widely held)?

A

Generally, not a huge pool of shareholders (50-100).

54
Q

What can closely held corps do wrt selling stock that others can’t?

A

Generally closely held corps can place restrictions on the sale of their shares to prevent outsiders from coming in.

55
Q

What must closely held corps do to place a restriction on the sale of their shares?

A

Restriction has to be conspicuously noted.

Ex: Has to be on certificate conspicuously and fully if those are issued.

56
Q

Are restrictions on shares of closely held corps enforceable?

A

Enforceable as long as certified and conspicuous.

57
Q

What kinds of restrictions on the sale of their shares can closely held corps impose?

A
  1. Can be outright prohibition on sales or transfers.
  2. Every sale or transfer requires company’s consent.
  3. Company can reserve right of first refusal (option to buy).
  4. ?
58
Q

Test for whether a restriction on the sale of shares is permissible:

A

Reasonability: Is it reasonable to restrict to maintain the legal status?

59
Q

Requirements for a 10b5 claim? (fed cause of action related to fraudulent purchases or sales of stocks or other securities)

A
  1. P must have purchased or sold the security.
  2. Transaction must have involved interstate conduct.
  3. D must have engaged in fraudulent or deceptive conduct.
  4. Conduct must relate to material info.
  5. D must have acted with scienter.
  6. P must have relied on D’s conduct.
  7. P must have suffered harm.
60
Q

What constitutes fraud for a 10b5?

A
  1. Untrue statement of material fact.
  2. Omission of a material fact that’s necessary to prevent statement already made from being misleading.

BUT opinions or predictions don’t count.

61
Q

What counts as material for 10b5?

A

Material if a reasonable investor would think that fact important in deciding whether to buy or sell the security.

62
Q

What is the scienter requirement for 10b5?

A

Intentionally or recklessly?

63
Q

What kind of harm is needed for a 10b5?

A

Has to be causal connection between conduct and harm.

64
Q

How do you compute damages for a 10b5?

A

Out of pocket damages: diff btw stock’s value and what P got.

No punitive damages.

65
Q

What does 16B do about insider trading?

A

Corp insider can be forced to return short-swing profits to corp under this provision. During any 6-month period, a corp insider who both buys and sells the corp’s stock is liable to corp for any profits made on those transactions (have to give the profit back to the company).

66
Q

What are the elements for a 16B?

A
  1. Applies only to corps with securities traded on a national securities exchange (publicly traded company).
  2. Must have assets of more than $10M and more than 500 shareholders.
  3. Applies only to corp insiders at that corp–a director, officer, or shareholder with more than 10% of stock.
67
Q

Can transactions from before you joined or after you left be covered under 16B?

A

Stuff you bought/sold before joining is fine. But stuff you bought and sold after you left could still be affected.

68
Q

What is 16B’s reporting requirement?

A

Corp insider’s must report changes in their stock ownership to SEC.

69
Q

Who elects board of directors?

A

Shareholders

70
Q

What can shareholders vote on other than electing board?

A

Major decisions that affect fundamental changes in the corp.

71
Q

What is the annual meeting requirement?

A

Every corp must hold an annual meeting to elect directors and conduct other shareholder business.

72
Q

What is the special meetings requirement.

A

Special meetings may be called on to vote on fundamental changes in the life of a corp.

State law dictates who can call for one. Typically only by some percentage of board, pres or other senior officer, or some percentage of shareholders.

73
Q

Notice requirements for a meeting:

A

Need valid notice. Shareholders must be given notice for either kind of meeting no fewer than 10 days and no more than 60 days before meeting. Must include time, date, location. For special meeting, also need purpose of meeting.

74
Q

If inadequate notice for a meeting, a shareholder can…

A

Challenge any actions taken at a meeting.

But if shareholder goes to a meeting that didn’t have valid notice, objection waived.

75
Q

What is the record date?

A

Used to determine which shareholders eligible to vote. Directors first fix a record date, which cannot be more than 70 days before meeting. Only shareholders who own shares on that date are entitled to vote.

76
Q

All shareholders may take any action without attending a meeting if they have…

A
  1. unanimous written consent, or

2. a proxy

77
Q

What is a proxy? How can they be legally effective?

A

Authorizes someone else to vote shares in accordance with wishes of shareholder.

To be legally effective:

  1. In writing
  2. Signed by shareholder as of record date
  3. Must be sent back to secretary of corp
  4. Cannot last more than 11 months, unless otherwise specified
78
Q

Major issues that shareholders often vote on:

A
  1. election of directors
  2. mergers or acquisitions
  3. share exchanges
  4. amendments to articles
  5. sales of all or virtually all of the assets
  6. dissolution
79
Q

What is the required quorum for a shareholder vote?

A

Need a quorum of the corp’s shares (not shareholders) repped at the meeting (in person or proxy). Quorum is a majority of corp’s outstanding shares as of the beginning of the meeting.

80
Q

If quorum present for a shareholder meeting vote, what constitutes a winning vote?

A

Votes cast in favor exceed those cast against. (We don’t care about abstentions.)

81
Q

T/F: Each shareholder may cast one vote, regardless of the number of shares owned.

A

False

82
Q

What is cumulative voting?

A

Refers only to voting for the board of directors. Protects shareholders’ right to elect directors.

If this type of voting allowed, shareholders given vote equal to number of shares they have x number of director positions being voted on.

83
Q

Shareholder inspection rights:

A

Shareholder may inspect the corp’s records as long as they have proper purpose for it.

Proper purpose = related to their financial interest in the corp, related to the business of the company.

84
Q

T/F: Cumulative voting for directors is only permitted when authorized by the corporation’s articles of incorporation.

A

True

85
Q

What is a direct lawsuit?

A

Shareholder sues company in shareholder’s own name for damages that will go to the shareholder.

86
Q

When can a direct lawsuit be brought?

A

Only if shareholder has been harmed directly, including interference with voting rights/dividends, tort injuries, etc.

87
Q

What is a derivative lawsuit?

A

Shareholder as P is suing on behalf of corporation. Harm harms entire corp. Any recovery goes to corp.

Ex: careless director, bad business decisions, disloyalty, etc.

88
Q

Requirements for bringing derivative lawsuit:

A
  1. Shareholder standing: Must have held shares at time of harm and holds them throughout the litigation. Must adequately and fairly rep the interests of the corp.
  2. Demand requirement: Must first demand board bring the lawsuit before the individual shareholder brings it. Some jx (but not RMBCA) have demand futility concept–not required if asking them would be futile (ex: board is the bad guy).
89
Q

Attorneys’ fees rules for derivative lawsuit:

A

If litigation produces substantial benefit to corp, P’s attorney paid by corp.

90
Q

Do shareholders owe duties to other shareholders?

A

Generally no.

Exceptions: Controlling shareholder may hold fiduciary duty to minority shareholders:

  1. With the sale of stock to an outside shareholder or looter. May be liable to minority shareholders when they sale share to someone intent on looting company. Red flags: someone has looted before or has given some indication this is what they intend to do.
  2. When controlling shareholder doing a transaction with the company himself, to his own benefit, owes duty of loyalty.
91
Q

What makes you a controlling shareholder?

A

50% + 1.

Or if someone has a way bigger % than average (like 15% when average investor has .1%).

92
Q

Who makes up the management of a corporation?

A

Board of directors and officers

93
Q

Who is the board of directors of a corp?

A

Group that manages and directs management of a corp’s businesses and affairs.

94
Q

What is a board’s primary tasks?

A
  1. Hire officers
  2. Oversee officers
  3. Make high level business corporate decisions
95
Q

Board requirements

A
  1. Directors have to be natural persons (humans)
  2. Elected by shareholders
  3. Serve for limited term (almost always 1 year)
96
Q

When can shareholders remove board directors?

A

Shareholders can do so without cause.

Exception: Staggered board–when board is composed of diff groups, each elected at a diff time, then can only be removed for cause and if articles provide. Sometimes if diff classes of shareholders in charge of electing diff groups within board, can be the ones in charge of their removal as well.

97
Q

Can different classes of shareholders be in charge of electing different groups within the board?

A

Yes. May be in charge of their removal as well in those cases.

98
Q

If vacancy or size of board increased, new board member can be chosen how?

A
  1. By shareholders in special meeting, or

2. By board members themselves in the interim

99
Q

What is the notice requirement for board meetings?

A
  1. Regular meetings: no notice needed

2. Special meetings: need notice. Attendance waives notice unless director promptly objects at the meeting.

100
Q

Can directors vote by proxy?

A

No

101
Q

Can directors enter into other voting agreements?

A

No

102
Q

Quorum for board meetings:

A

Majority of total number of directors unless bylaws specify

103
Q

What is an affirmative vote for a board meeting?

A

Majority vote of those present at the meeting

104
Q

Board may approve proposal not in person if…

A

Agreed upon by unanimous written consent.

105
Q

To avoid potential liability for a board decision, director has to dissent by…

A
  1. Entering dissent in meeting minutes;
  2. Filing written dissent before meeting adjourned; or
  3. Sending written dissent by certified or registered mail to corp’s secretary just after the adjournment.
106
Q

Who are a corporation’s officers? What duties do they owe?

A

Selected by board. Run corp on daily basis. Typically pres, sec, treasurer. Could be other positions starting with “chief.”

Owe fiduciary duties of loyalty and care.

107
Q

Business judgment rule:

A

Rebuttable presumption that in absence of fraud, illegality or self-dealing, courts will not disturb good faith business decisions.

108
Q

What’s the standard of care that management owes to corp?

A

Standard of care: An officer must act with the care that a person in a like position would reasonably believe is appropriate under similar circumstances. BUT if they have special skills, those have to be used.

Reliance defense: Can rely on expertise of other officers and employees, outside experts, and committees of the board.

109
Q

Do corp management owe duty of loyalty to corp?

A

Yes. Director/officer may not receive unfair benefit to detriment of corp without effective disclosure and ratification. (Almost always self-dealing transactions or corp opportunities.)

110
Q

Corporate opportunity doctrine:

A

May be violation of duty of loyalty if corp officer usurps or steals a corp opp.

111
Q

A self-interested transaction may be upheld if…

A
  1. It is disclosed and upheld either by majority of disinterested directors or majority of disinterested shareholders; or
  2. If they can demonstrate it was fair. Ex: it was a fair salary, or company would have never gotten into that business, etc. (argument most likely to succeed).
112
Q

What is indemnification?

A

Corp paying for director or officer’s defense in litigation, usually via insurance.

113
Q

When is indemnification required?

A

If director/officer successfully defends the case.

114
Q

When is indemnification not allowed?

A

If director/officer is liable for receiving an improper benefit.

115
Q

When is a corp allowed to (but not required to) indemnify director/officer?

A

If lose but acted in good faith with no intent to harm corp or had no reasonable cause to believe conduct was illegal.

116
Q

Who has to approve fundamental changes?

A

Both board of directors and shareholders.

117
Q

Examples of fundamental changes

A

Mergers: Combo of two or more corps and one firm assumes obligations of other.

Consolidation: Neither corp survives, new entity formed, obligations of both assumed.

Dissolution: End of a corp. Either voluntary by shareholders and directors, or involuntarily.

A share exchange.

Not fundamental: Corp bylaws being amended.

118
Q

A corp may be dissolved involuntarily by…

A

1) creditors, if they can show corp not paying its debts

2) shareholders if can show:
a) corp assets being wasted;
b) directors are acting fraudulently; or
c) directors/shareholders are inextricably deadlocked

119
Q

Process for making a fundamental change:

A
  1. Board proposes resolution.
  2. Notice sent to shareholders of special meeting.
  3. Majority of shareholders casting vote must vote in favor of the fundamental change.
120
Q

How can dissolution be commenced?

A

Among other things, the board adopts a resolution proposing dissolution.

121
Q

What are appraisal rights?

A

When fundamental issue comes up and shareholder doesn’t approve of it, can get these rights. Entitles them to have their shares purchased by corp at fair value determined by the court.

122
Q

To invoke appraisal rights, shareholder must…

A
  1. Send written notice to corp prior to your vote of your intent to dissent.
  2. At meeting, must abstain or vote no.
  3. Must make prompt written demand for FMV after action approved.
123
Q

If shareholder and corp disagree about FMV…

A

Court can hire expert appraiser to determine it.

124
Q

Characteristics of closely held corp:

A

50-100 shareholders or less. Officers are sometimes directors too. Typically not publicly traded.

Can relax the rules sometimes. Ex: Can have voting agreements; preemptive rights may be allowed; etc.

125
Q

What is an S corp?

A

Corp for state corp law purposes, but gets taxed specially for tax purposes. Only taxed once (pass-through); don’t tax their profits, just the shareholders.

Limited to a smaller number of shareholders. Residency reqs. Natural persons req.

126
Q

What is a limited liability corp (LLC)?

A

Combines limited liability of corps with tax treatment of partnerships.

No limit on number of shareholders. No residency reqs. No natural persons reqs.

File articles of an organization. Have operating agreement. Owners are referred to as members rather than shareholders. Presumed to be managed by all its members rather than a board.

127
Q

What is a distribution?

A

When corp removes profit from corp (a dividend) and gives it to shareholders.

128
Q

What is a liquidation?

A

Business ended and money leftover distributed.

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