Corporations Flashcards
1
Q
who owns a corporation?
A
its shareholders
2
Q
who is in charge of management?
A
board of directors
3
Q
who elects the board of directors?
A
the shareholders
4
Q
who does the board appoint to carry out duties?
A
officers
5
Q
Formation of a Corporation
A
requirements:
- person = incorporator
- paper = articles of incorporation
- act = notarized, filed, paid fees
creates a de jure corporation
6
Q
Incorporator
A
executes the articles and delivers them to the Secretary
any person or entity can serve as an incorporator
7
Q
Articles of Incorporation
A
requirements:
- name of the corporation (magic words = corp., comp., inc., limited)
- name and address of each incorporator
- registered agent
- street address of registered office
- 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
8
Q
Act of Incorporation
A
incorporator delivers notarized articles to Secretary and pays filing fees
9
Q
Organizational Meeting
A
incorporators (or initial directors if named) hold the meeting:
- incorporators elect the initial directors (if not already named)
- then complete organization of the corporation by:
- appointing officers
- adopting bylaws
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
11
Q
Internal Affairs Rule
A
state of incorporation governs the law of the internal affairs of the corp
12
Q
Corporation
A
business that has legal entity status
can sue/be sued, pays taxes, contribute to charity, etc.
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
14
Q
Taxation of Corporation
A
double-taxation
taxed at entity level and SH level
15
Q
S Corporation
A
corporation that gets partnership tax treatment
requirements:
- no more than 100 SHs
- all SHs are US citizens/residents
- one class of stock only
- not publicly-traded
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
17
Q
Defective Incorporation
A
if proprietors were unaware a corporation was not formed, they are personally liable for business debts unless:
- de facto corporation
- corporation by estoppel
*doctrines abolished in many states
18
Q
De Facto Corporation
A
if unaware they failed to create a corporation
requirements:
- relevant incorporation statute
- parties made good faith, colorable attempt to comply and
- some exercise of corporate privileges
* treated as corporation for all purposes except an action by the state
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
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
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
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:
- certificate of authority from Secretary
- info from articles
- proves good standing in home state
- appoints registered agent and office in the state
23
Q
Debt Securities
A
corporation borrows money and agrees to repay with interest
aka bonds
bond-holder is a creditor
24
Q
Equity Securities
A
corporation sells ownership interest
aka stock
stock-holder is an owner
25
Issuance of Stock
when corporation sells its own stock
26
Subscriptions
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
27
Consideration for Issuance of Stock
may be issued for "any tangible or intangible property or benefit to the corporation"
* money, property, services (past/future), promissory notes
28
Amount of Consideration
**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
29
Preemptive Rights
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
30
Directors
must have one or more
number can be set in the articles or bylaws
31
Election of Directors
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
32
Removal of Directors
SHs can remove a director **with or without cause**
_some states_: if staggered board, then only **with cause**
33
Vacancy of Directors
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
Director Action
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
Board of Directors Meeting
_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
Quorum
Board of Directors
\*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
Role of Board
manages the corporation
can delegate to a committee, but committee cannot *themselves*:
* delcare distributions
* fill board vacancies
* recommend fundamental changes to SHs
38
Fiduciary Duties of the Board
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
Duty of Care
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**
* 2. was **informed** AND
* 3. had a **rational basis**
40
Duty of Loyalty
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
* 2. 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
2. competing ventures
* director cannot compete directly with her corporation
* _remedy_: constructive trust on profits made from competing venture
3. 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
Loans
corporation can make loans to the director if **reasonably expected** to benefit the corporation
42
Director Liability
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
* 2. delivered in writing to presiding officer at meeting OR
* 3. 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
Officers
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
Indemnification of Directors and Officers
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
3. _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
Limiting Fiduciary Duty Liability
articles can eliminate liability for **duty of care** cases only
46
Close Corporation
SHs manage the corporation directly
_characteristics_ = few SHs and not publicly-traded
47
Shareholder Management Agreement
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
Special Fiduciary Duty in Close Corporations
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
Licensed Professionals
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
Piercing the Corporate Veil
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
Alter Ego
_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
Undercapitalization
_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
Derivative Suits and Remedies
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
Requirements of Derivative Suits
_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
4. corporation is joined as a defendant
5. parties can settle or dismiss only with court approval
55
Dismissal of Derivative Suit
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
Authorized Stock
the number of shares the corporation may issue
set out in the articles
57
Issued Stock
the number of shares the corporation has sold
58
Outstanding Stock
shares the company has _issued_ and _not reacquired_
59
SH Voting
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
Proxy Voting
_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
Revocation of Proxy
_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
Shareholder Voting Trusts
_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
Shareholder Voting/Pooling Agreement
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
Where Shareholders Vote
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
Notice for Shareholder Meetings
_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
What Do Shareholders Vote On
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
Cumulative Voting
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
Stock Transfer Restrictions
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
Right of Shareholder to Inspect Books and Records
Non-Controversial Things
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
Right of Shareholder to Inspect Books and Records
Controversial Things
_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
Distributions
_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
Fundamental Corporate Change
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
Procedure for Fundamental Corporate Change
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
Dissenting Shareholder Right of Appraisal
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
Perfecting a Right of Appraisal
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
Amendment of Articles
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
Mergers and Consolidations
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
Transfer of All or Substantially All of the Assets
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
Conversion
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
Voluntary Dissolution
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
Involuntary Dissolution
_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
Winding Up
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
