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MEE > Corporations > Flashcards

Corporations Flashcards

1
Q

who owns a corporation?

A

its shareholders

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2
Q

who is in charge of management?

A

board of directors

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3
Q

who elects the board of directors?

A

the shareholders

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4
Q

who does the board appoint to carry out duties?

A

officers

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5
Q

Formation of a Corporation

A

requirements:

  1. person = incorporator
  2. paper = articles of incorporation
  3. act = notarized, filed, paid fees

creates a de jure corporation

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6
Q

Incorporator

A

executes the articles and delivers them to the Secretary

any person or entity can serve as an incorporator

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7
Q

Articles of Incorporation

A

requirements:

  1. name of the corporation (magic words = corp., comp., inc., limited)
  2. name and address of each incorporator
  3. registered agent
  4. street address of registered office
  5. stock information
  • authorized stock = max number of shares corp can sell
  • different classes of stock
    • state number of shares per class
    • state voting rights and preferences
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8
Q

Act of Incorporation

A

incorporator delivers notarized articles to Secretary and pays filing fees

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9
Q

Organizational Meeting

A

incorporators (or initial directors if named) hold the meeting:

  1. incorporators elect the initial directors (if not already named)
  2. then complete organization of the corporation by:
  • appointing officers
  • adopting bylaws
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10
Q

Bylaws

A

internal document giving operating manual, setting record dates, etc.

articles govern if the bylaws conflict

board or SHs can amend/repeal/adopt bylaws

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11
Q

Internal Affairs Rule

A

state of incorporation governs the law of the internal affairs of the corp

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12
Q

Corporation

A

business that has legal entity status

can sue/be sued, pays taxes, contribute to charity, etc.

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13
Q

B Corporation

A

“benefit” corporation - must be stated in the articles

for-profit business to benefit a broader social policy cause

files annual benefit report assessing its performance re its social mission

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14
Q

Taxation of Corporation

A

double-taxation

taxed at entity level and SH level

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15
Q

S Corporation

A

corporation that gets partnership tax treatment

requirements:

  1. no more than 100 SHs
  2. all SHs are US citizens/residents
  3. one class of stock only
  4. not publicly-traded
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16
Q

Limited Liability

A

SHs only liable for their investment

  • not personally liable for the corporation’s debts, torts, breaches of K

directors and officers are also not liable for corporate debts

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17
Q

Defective Incorporation

A

if proprietors were unaware a corporation was not formed, they are personally liable for business debts unless:

  1. de facto corporation
  2. corporation by estoppel

*doctrines abolished in many states

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18
Q

De Facto Corporation

A

if unaware they failed to create a corporation

requirements:

  1. relevant incorporation statute
  2. parties made good faith, colorable attempt to comply and
  3. some exercise of corporate privileges
    * treated as corporation for all purposes except an action by the state
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19
Q

Corporation by Estoppel

A

someone who treats a business as a corporation may be estopped from denying that it is a corporation

  • proprietors must not know the corporation failed
  • applies only in contract cases, not torts
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20
Q

Promoters

A

persons acting on behalf of a corporation not yet formed

they are liable on pre-incorporation contracts, even if the corporation adopts the contract, unless there has been a novation

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21
Q

Corporation Liability on Pre-Incorporation Contracts

A

corporations are not liable unless they have adopted the contract:

  • express = board takes action/vote
  • implied = corporation accepts a benefit
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22
Q

Foreign Corporations (States)

A

must qualify and pay prescribed fees to do business in other states

  • foreign if incorporated in another state
  • not needed for occasional/sporadic business activity
  • cannot state a claim in the state without this

requirements:

  1. certificate of authority from Secretary
  2. info from articles
  3. proves good standing in home state
  4. appoints registered agent and office in the state
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23
Q

Debt Securities

A

corporation borrows money and agrees to repay with interest

aka bonds

bond-holder is a creditor

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24
Q

Equity Securities

A

corporation sells ownership interest

aka stock

stock-holder is an owner

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25
Q

Issuance of Stock

A

when corporation sells its own stock

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26
Q

Subscriptions

A

written offers to buy stock from corporation

pre-incorporation subscriptions = irrevocable for 6 months

post-incorporation subscriptions = revocable until accepted by the corporation

  • accepted = when the board accepts the offer
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27
Q

Consideration for Issuance of Stock

A

may be issued for “any tangible or intangible property or benefit to the corporation”

  • money, property, services (past/future), promissory notes
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28
Q

Amount of Consideration

A

par = minimum issuance price

no par = no minimum issuance price

treasury stock = stock issued then reacquired (can set any price)

watered stock = stock sold under par

  • corporation can recover from:
    • directors if they knowingly authorized the issuance
    • buyer of the stock, b/c he has notice of par value
  • cannot recover from a third-party in good faith
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29
Q

Preemptive Rights

A

right of an existing SH of common stock to maintain her percentage of ownership (prevent dilution)

unless stated in the articles, there are no preemptive rights

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30
Q

Directors

A

must have one or more

number can be set in the articles or bylaws

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31
Q

Election of Directors

A

initial directors can be named in the articles

if not named, incorporators elect directors at the organizational meeting

after that, shareholders elect the directors annually

unless staggered board

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32
Q

Removal of Directors

A

SHs can remove a director with or without cause

some states: if staggered board, then only with cause

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33
Q

Vacancy of Directors

A

if there is a mid-term vacancy on the board:

  1. SHs select the replacement director if they caused the vacancy
  2. otherwise, the directors select the replacement to finish out the term
34
Q

Director Action

A

individual directors cannot bind the corporation

board of directors must act as a group by either:

  1. unanimous agreement in writing or
  2. at a meeting

if they do not meet the requirements, act is void unless ratified by a valid act

35
Q

Board of Directors Meeting

A

types:

  1. regular meeting – no notice is required
  2. special meeting – notice is required
  • two days’ notice of date, time, and place
  • failure to give notice means act is voidable unless:
    • directors waive notice in writing OR
    • by attending without objecting at the outset

no proxies are allowed

act requires a quorum

36
Q

Quorum

Board of Directors

A

*DEFAULT RULE*

quorum = majority of all directors

  • quorum can be broken if people leave the meeting
  • once a quorum is lost, the board cannot act

once quorum is achieved, votes to act = majority of those present

37
Q

Role of Board

A

manages the corporation

can delegate to a committee, but committee cannot themselves:

  • delcare distributions
  • fill board vacancies
  • recommend fundamental changes to SHs
38
Q

Fiduciary Duties of the Board

A
  1. duty of loyalty
    * discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation
  2. duty of care
    * use the care that a prudent person in the same position would reasonably believe appropriate under the circumstances
39
Q

Duty of Care

A

burden is on the π

  1. nonfeasance (director doesn’t act)
    * director is liable only if his breach harmed the corporation
  2. misfeasance (director makes a decision that hurts the business)
  • director is not liable if she meets the business judgment rule
  • BJR = the court will not second-guess a bad business decision if:
      1. it was made in good faith
      1. was informed AND
      1. had a rational basis
40
Q

Duty of Loyalty

A

burden is on the ∆; BJR does not applye

  1. self-dealing
  • interested director transactions will be set aside unless the director shows either:
      1. deal was fair to the corporation when entered OR
      1. her interest and relevant facts were disclosed/known and the deal was approved by either:
        * majority of disinterested directors (at least 2) OR
        * majority of disinterested shares
        * note: some courts also require a showing of fairness
  1. competing ventures
  • director cannot compete directly with her corporation
  • remedy: constructive trust on profits made from competing venture
  1. corporate opportunity (expectancy)
  • director cannot usurp a corporate opportunity unless:
    • he tells the board about it AND
    • waits for the board to reject the opportunity
  • remedy: sell to the corporation at cost or a constructive trust for the proceeds if sold to someone else
41
Q

Loans

A

corporation can make loans to the director if reasonably expected to benefit the corporation

42
Q

Director Liability

A

directors are presumed to agree with board action unless:

  1. dissent or abstention
  2. noted in writing in the corporate records
    1. in the minutes
    1. delivered in writing to presiding officer at meeting OR
    1. written dissent immediately after the meeting
      * NOT oral dissent
      * CANNOT dissent if voted for it at the meeting

defenses/exceptions:

  1. not liable if you were absent from the meeting
  2. might not be liable if good faith reliance on the info provided
43
Q

Officers

A

agents of the corporation

  • whether they can bind depends on whether she has authority
  • president has inherent authority to bind in the ordinary course

traditionally, required to have president, treasurer, and secretary

Board selects, removes, and sets compensation

  • SHs cannot hire/fire officers
44
Q

Indemnification of Directors and Officers

A
  1. cannot indemnify D/O who was held liable to the corp or who received an improper benefit
  2. must indemnify D/O who was successful in defending on the merits
  • some states = must win entire case
  • other states = indemnified to the extent won
  1. may indemnify D/O her litigation expenses if shows acted in good faith with the reasonable belief it was in the company’s best interest
    * disinterested directors/shares or independent counsel decides
45
Q

Limiting Fiduciary Duty Liability

A

articles can eliminate liability for duty of care cases only

46
Q

Close Corporation

A

SHs manage the corporation directly

characteristics = few SHs and not publicly-traded

47
Q

Shareholder Management Agreement

A

used to set up alternative management in a close corporation

two ways:

  1. in the articles and approved by all SHs or
  2. by unanimous written SH agreement
48
Q

Special Fiduciary Duty in Close Corporations

A

whoever manages owes fiduciary duties of loyalty and care

in close corporations, also owe duty between SHs of utmost good faith

  • ex: oppression of minority SHs, because it thwarts the SH’s legitimate goals for investing and has no way out
49
Q

Licensed Professionals

A

can incorporate as a professional corporation or association

must have P.C. or P.A. in the name

articles must state purpose is to practice in a particular profession

SHs generally not liable for corporate obligations or for other professionals’ malpractice

50
Q

Piercing the Corporate Veil

A

SHs generally not liable for corporate debts unless PCV

only applies in close corporations

to PCV and hold SHs personally liable:

  • must have abused privilege of incorporating and
  • fairness must require holding them liable

occurs only in cases where:

  • alter ego or
  • undercapitalization
51
Q

Alter Ego

A

PCV when:

  1. SH abused the privilege of incorporating and
  2. fairness must require holding them liable

identity of interests:

abuse of privilege = SH is treating the corporate assets as his own

unfair = creditors are not being paid

52
Q

Undercapitalization

A

PCV when:

  1. SH abused the privilege of incorporating and
  2. fairness must require holding them liable

undercapitalization:

abuse of privilege = SHs failed to invest enough to cover prospective liabilities

unfair = victim has no other recourse

  • note: courts may be more willing to PCV for a tort victim than a contract claimant
53
Q

Derivative Suits and Remedies

A

SH is suing to enforce the corporation’s claim–not her own

if SH wins derivative suit:

  • corporation gets money judgment
  • SH recovers costs and attorney’s fees (usually from the judgment)

if SH loses: S cannot recover costs

  • is also liable to the defendant he sued if no reasonable cause
54
Q

Requirements of Derivative Suits

A

requirements:

  1. stock ownership when claim arose and throughout the suit
    * ownership by operation of law = inheritance or divorce decree
  2. π must provide adequate representation of corporation’s interest
  3. π must make written demand on corporation that they bring suit
  • some states = always make the demand and have to wait 90 days
  • other states = demand not required if it would be futile
  1. corporation is joined as a defendant
  2. parties can settle or dismiss only with court approval
55
Q

Dismissal of Derivative Suit

A

corporation may move to dismiss derivative suit if:

  1. based on an independent investigation
  2. that concluded the suit is not in the corporation’s best interest
  3. by a special litigation committee
    * consists of independent directors or court-appointed panel of one or more independent persons
56
Q

Authorized Stock

A

the number of shares the corporation may issue

set out in the articles

57
Q

Issued Stock

A

the number of shares the corporation has sold

58
Q

Outstanding Stock

A

shares the company has issued and not reacquired

59
Q

SH Voting

A

unless otherwise determined, each outstanding share gets one vote

  • must be the record shareholder of the outstanding stock
  • as of the record date in order to vote
    • if corp reacquires stock before the record date and owns it as treasury stock as of the record date, nobody votes it

an executor can vote for a deceased SH if she dies after the record date

SH votes can occur by proxy

60
Q

Proxy Voting

A

a proxy is:

  1. a writing
  2. signed by the record SH
  3. directed to the secretary of the corporation
  4. authorizing another to vote his shares

good for 11 months unless stated otherwise

61
Q

Revocation of Proxy

A

proxy can be revoked either:

  1. in a writing to the secretary
  2. or by attending the meeting and voting

a proxy is revocable even if it says it’s irrevocable unless it is a proxy coupled with an interest:

  1. the proxy must say it is irrevocable and
  2. the proxy-holder has some interest in the shares other than voting, such as an option to buy the stock
62
Q

Shareholder Voting Trusts

A

requirements:

  1. 10-year maximum
  2. written trust agreement controlling how the shares will be voted
  3. copy to the corporation
  4. transfer legal title to the voting trustee
  5. original SHs receive trust certificates and retain all SH rights except for voting
63
Q

Shareholder Voting/Pooling Agreement

A

SHs can enter into voting agreements so long as they are written and signed

in states that allow voting agreements, there is no need for a voting trust

64
Q

Where Shareholders Vote

A

either at a meeting or by unanimous written consent signed by holders of all voting shares

annual meetings = required meetings

  • SHs elect directors at the meeting (cannot remove officers)
  • SH can petition court to order one if none is held in 15 months

special meetings = can be called by the board, President, holders of 10%+ of the outstanding shares, or anyone else authorized in the bylaws

65
Q

Notice for Shareholder Meetings

A

requirements:

  1. must give notice to every SH entitled to vote
  2. delivered between 10-60 days before the meeting
  3. includes date, time, and place of meeting
  4. special meetings = requires purpose and cannot do anything else!

consequences: if fail to give proper notice, action taken at the meeting is voidable unless those not sent notice waive the defect

  • express = in writing and signed anytime
  • implied = attend the meeting without objecting at the outset
66
Q

What Do Shareholders Vote On

A
  1. to elect directors = plurality vote
  2. to remove directors = traditionally, majority of shares entitled to vote
    * recently, treated more like other matters
  3. fundamental corporate changes = majority of shares that actually voted
  4. other matters = majority of shares that actually voted
67
Q

Cumulative Voting

A

unless otherwise stated in the articles, default is straight-voting

cumulative is usually only in close corporations

gives smaller SHs a better chance of electing someone to the board

  • one at-large election
  • voting power = number of shares * number of directors to elect
68
Q

Stock Transfer Restrictions

A

in standard corporations, SH can sell or give her stock away

in close corporations, SHs can place restrictions on transferability

  • restrictions are OK if reasonable
  • aka not an undue restraint on alienation
  • right of first refusals are valid
  • restriction can be enforced by a transferee if:
    • restriction is conspicuously noted on the stock certificate
    • or the transferee had actual knowledge of the restriction
69
Q

Right of Shareholder to Inspect Books and Records

Non-Controversial Things

A

any SH has standing to demand access

requirements:

  • written demand
  • at least 5 business days in advance
  • need not state a proper purpose

includes: articles, bylaws, minutes of SH meetings (3 years), names and addresses of current D/O, most recent annual report of corporation

70
Q

Right of Shareholder to Inspect Books and Records

Controversial Things

A

controversial things: excerpts of minutes of board meetings, accounting records, records of SHs

requirements:

  • written demand
  • at least 5 business days in advance
  • must state a proper purpose
    • proper purpose = one related to her interest as a SH
71
Q

Distributions

A

payments by corporation to SHs:

  • dividends
  • repurchase SH’s stock
  • redemption

distributions are in the board’s discretion

  • D/O jointly and severally responsible for improper distributions
  • SHs personally liable only if they knew it was improper

SH can only demand if very strong showing of abuse of discretion

modern view: cannot make distribution if corporation insolvent or distribution would make it insolvent

72
Q

Fundamental Corporate Change

A
  1. amending the articles
  2. merging or consolidating into another company
  3. transfer substantially all assets
  4. convert to another business form
  5. dissolve
73
Q

Procedure for Fundamental Corporate Change

A
  1. board action adopting resolution of fundamental change
  2. board submits proposal to SHs with written notice
  3. SH approval = majority of shares entitled to vote (rule is changing)
  4. deliver a document to the Secretary of State
74
Q

Dissenting Shareholder Right of Appraisal

A

right to force the corporation to buy your stock for fair value

basically, only exists in close corporations (not publicly traded; not more than 2,000 SHs)

only triggered by:

  1. merging or consolidating
  2. transferring substantially all assets
  3. stock being acquired in a share/exchange
  4. conversion to another business form
75
Q

Perfecting a Right of Appraisal

A
  1. before SHs vote, file written notice of objection and intent to demand payment with the corporation
  2. at SH vote, abstain or vote against the proposed change
  3. after the vote, make written demand to be bought out and deposit stock with the corporation

*exclusive remedy if SH does not like a fundamental change

76
Q

Amendment of Articles

A

board of director action + notice to SHs

SH approval = majority of shares entitled to vote

if approved, deliver amended articles to the Secretary

generally no dissenting SH rights of appraisal

77
Q

Mergers and Consolidations

A

board of director action of both corporations + notice to SHs

SH approval from both corporations = majority of shares entitled to vote

  • no SH approval if 90%+ owned sub is merged into a parent
    • i.e., a short-form merger

if approved, surviving corp delivers articles of merger/consolidation to Secretary

right of appraisal for both SHs entitled to vote on merger/consolidation and for SHs of sub in short-form merger

effect = successor liability (successor takes rights/liabilities)

78
Q

Transfer of All or Substantially All of the Assets

A

rule of thumb = at least 75% of the assets

fundamental corporate change only for the selling corporation

board action from both corporations + notice to selling company’s SHs

approval by selling company’s SHs = majority entitled to vote

rights of appraisal for SHs of selling corporation

deliver articles of exchange in share exchange to Secretary

no successor liability unless mere continuation of selling corp

79
Q

Conversion

A

business converts to another form (i.e., corp to LLC)

board approval, notice to SHs, SH approval, deliver doc to Secretary, dissenting SHs right of appraisal

80
Q

Voluntary Dissolution

A

board of directors action + SH approval

file notice of intent to dissolve with Secretary

corp stays in existence to wind up

notify creditors so they can make claims

81
Q

Involuntary Dissolution

A

SH can petition because of:

  • director abuse, waste of assets, misconduct
  • director deadlock that harms the corporation
  • SHs fail at consecutive annual meetings to fill board vacancy
    • court may order buyout instead for this one
    • especially in a close corporation

creditor can petition because of:

  • corporation insolvency
  • and creditor has unsatisfied judgment
  • or corporation admits debt in writing
82
Q

Winding Up

A

dissolution starts the process of ending the corporation’s existence

steps to wind up:

  1. written notice to known creditors
  2. publish notice in newspaper of county where PPB
  3. gather all assets
  4. convert assets to cash
  5. pay creditors
  6. distribute sums to SHs pro-rata by share unless liquidation preference

MEE (8 decks)

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