Corporations Flashcards
Definition of a corporation
A distinct legal entity that can conduct business in its own right by buying, selling, and holding property or by suing or being sued, and by lasting forever
Shareholders are
investors - the ultimate owners of a residuary interest in a corporation
Directors are elected by __________. What is their job
Elected by shareholders.
They are responsible for major corporate decisions & appoint officers
Officers do what?
Run corporation on a daily basis
What’s a promoter?
A fiduciary of the corporation. Enters into contracts on its behalf
Who is liable for pre-incorporation agreements?
Promoters are personally liable
What’s a novation?
A special agreement between the promoter, corporation, and a third party that alters the default rule - shifts liability from promoter to corporation
How to form a corporation?
Sign and file the articles of incorporation
pay fee
Articles Must Include:
- name of corporation (including company designation)
- name and address of agent
- names and addresses of incorporators
- duration of corporation (most are perpetual)
- Purpose of corporation
- Authorized shares
Ultra Vires?
Acts beyond the powers of the corporation
- shareholders can sue to enjoin an ultra vires action
- corporation can take action against ultra vires directors or officers
- The state can initiate proceedings to enjoin such actions
** not common today **
When is a corporation formed?
When the secretary of state accepts the fee and files the articles
Is a corporation forced to have bylaws?
no
When bylaws and articles of incorporation conflict, which one wins?
Articles of incorporation
When all the statutory requirements for a corporation have been satisfied what is formed?
a de jure corporation
De facto corporation
When a corporation is not properly formed, but nevertheless enters into obligations after it was supposedly formed
Organizers must have
- made a good faith effort to comply with incorporation process and
- have no actual knowledge of a defect in corporate status
Alter ego (piercing the veil)
Investor or shareholders have failed to observe any corporate formalities between the corporation and the person - treats corp. just like itself
undercapitalization (piercing the veil)
Failure to maintain funds sufficient to cover foreseeable liabilities
Fraud (piercing the veil)
Parties engaged in fraud or fraud-like behavior
Basic rule with piercing the veil
Corporations generally enjoy limited liability, but there may be circumstances in which a court is willing to pierce the veil to get assets from shareholders
Holds the debt of the corporation
creditors
entitled to all the value that remains in a corporation after the debts have been paid
stock holders
authorized shares
maximum number of shares that the directors of a corporation can sell
issue shares
number of shares from the authorized pool that the directors have actually sold
outstanding shares
shares that were once issued to shareholders and remain in the possession of the shareholders
- allow shareholders to VOTE
treasury shares
stock previously issued to shareholders, but then reacquired by the corporation
preferred stock has preference over common stock when it comes to:
- dividends
- liquidation
The minimum amount a share must be sold for
par value
not really used today
Corporations can receive ________________- the board of directors deems adequate (i.e. labor, IP rights, etc.)
any valid consideration
The corporation sets par value amount and then sells stock for less than that amount
watered stock
Before incorporation, a stock subscription agreement is irrevocable for __________
6 months
The right to acquire stock to maintain your percentage of ownership when new shares are issued (i.e. I buy more stock to keep a 25% ownership)
preemptive rights
** default is that shareholders don’t have preemptive rights unless negotiated or included in the articles**
Two ways to get money out of a corporation
- dividends
- corporation buys back shares
Who has the power to authorize dividends?
The board of directors
- Shareholders have NO RIGHTS TO DIVIDENDS
When can a board of directors not declare dividends?
- corporation is insolvent
- issuing dividends will make the corporation become insolvent
What happens if a director votes to authorize an unlawful dividend (and doesn’t rely in good faith on financial statements)
he’s personally liable jointly & severally to the corporation
- NOT LIABLE IF RELIED IN GOOD FAITH ON FINANCIAL STATEMENTS
When a shareholder collects as preferred stock and then participates with the common shares, he has:
participating preferred shares
What happens with cumulative shares if no dividend was paid last year?
They get the dividend from last year and from this year
General rule about selling stock
Shareholders can sell to ANYONE at ANY TIME for ANY PRICE
Stock selling restrictions in closely held corporations are there to:
- prevent outsiders from being involved
- let initial shareholders remain control over the shares
test of reasonableness - is this reasonable to maintain the legal status?
Restrictions on closely held corporations must be:
Conspicuously noted (mentioned on stock certificate)
** even lawful restrictions can’t be used against someone with no knowledge of them (unless it’s certified and conspicuous) **
Types of restrictions on closely held corporations
- outright prohibitions on transfers
- requires company’s consent
- company has an option to buy
- company has a right of first refusal
What’s a 10b-5?
Fraudulent purchase or sale of stock or other securities
For a private person to bring a 10b-5 what needs to be met?
- Plaintiff has to have purchased or sold the security
- transaction involves interstate commerce
- defendant engaged in fraudulent or deceptive conduct
- conduct related to material information
- defendant acted with scienter (intentional or reckless)
- Plaintiff relied on Defendant’s conduct
- Plaintiff suffered harm (out of pocket damages - NO PUNITIVES)
Insider trading is also known as…
Section 16(B)
elements for insider trading
- bought or sold in 6 months
- for profit
- are they a corporate insider (directors, officers, shareholders who hold more than 10% of any class of stock, or officers in general?)
- from applicable company (on national exchange or assets of more than $10M and more than 500 shareholders?)
shareholder notice for meetings
- no less than 10 days but no more than 60 before meeting
- includes date, time, and location
SPECIAL MEETING - also includes purpose
** attending meeting waives lack of notice**
record date
if you hold stock on that date, you’re eligible to vote
- no more than 70 days before meeting
requirements for proxies
- in writing
- signed by the shareholder as of the record date
- be sent to secretary of corporation
- state that it authorizes another to vote the shareholder’s shares
- cannot be valid for more than 11 months, unless otherwise specified
quorum is
a majority of a corporation outstanding shares (not share holders) are present at the start of the meeting
When does cumulative voting apply
Only for election of directors
formula for cumulative voting
= # of shares they own x # of directors running for office
A shareholder can inspect a company’s books and records so long as what?
He has a proper purpose (related to shareholder’s financial interest in the corporation)
When can a shareholder sue in their own name?
When they’ve been directly harmed
- interference in voting rights or dividends
- misinformation about important issues
- tort injury
requirements for standing in a derivative suit
- must maintain contemporaneous stock ownership
- must have been a shareholder at the time of harm
- must hold the shares throughout litigation
- must fairly and adequately represent the interests of the corporation
recovery in a derivative suit goes to the _________-
corporation
shareholders duties
In general, shareholders do not owe duties to other shareholders
When does a controlling shareholder owe duties to a minority shareholder?
- Sale of stock to an outsider/looter (selling to an outsider intent on looting the company)
- Controlling shareholder contracts with the corp.
Directors must receive ____ days notice for ______ meetings
2 days
special meetings
** don’t get notice for regular meetings**
attendance waives notice - unless director promptly objects at the start of the meeting
How does a director dissent?
- enter dissent in meeting minutes
- file written dissent before meeting is adjourned
- provide written dissent by certified or registered mail to the corporation’s secretary immediately following the adjournment of the meeting
business judgement rule
In the absence of fraud, illegality, or self-dealing, courts will not disturb good-faith business decisions
A self-dealing transaction can be upheld by
- majority of disinterested shareholders ratify
or - majority of disinterested directors ratify
ratification doesn’t always win the case - it might only shift the burden
Indemnification
the practice of corporations paying for the costs of a director or officer’s defense in litigation, usually by purchasing insurance
required
prohibited
and permissive indemnification
required = director or officer successfully defends the case
prohibited = director or officer is liable for receiving an improper benefit from the corp. or otherwise loses a lawsuit
permissive = director/officer acted in good faith and had no reasonable cause to believe the conduct was illegal
Dissolution
The existence of a corporation is extinguished either voluntarily by the shareholders and the directors or involuntarily by disgruntled parties
- creditors
- shareholders
- corp. assets being wasted
- directors are acting fraudulently
- directors and shareholders are deadlocked
procedure for shareholder invoking dissenter’s rights
- sent written notice to corporation prior to the vote of her intent to dissent
- shareholder abstains or votes “no” at meeting
- shareholder makes prompt written demand for fair market value after action has been approved
How is an LLC formed?
files articles of organization and an operating agreement with the state
owners are called MEMBERS
Definition of a conflict of interest transaction
any transaction between a director and his corporation that would normally require approval of the board of directors and that is of such financial significance to the director that it would reasonably be expected to influence the director’s vote on the transaction
