Corporations Flashcards
Piercing the Corporate Veil
Courts will disregard the corporate form whenever necessary to prevent fraud and achieve equity.
To Pierce the Corporate Veil, there must be:
(1) Unity of Interest between the shareholder & the corporation (a total disregard for the separate existence of the corporation); and
(2) Fraud or injustice
Van Dorn Test: PCV
4 Factors to show unity of interest:
(1) Failure to maintain adequate corporate records or comply with corporate formalities
(2) Commingling of funds or assets
(3) Undercapitalization
(4) One corporation treats the assets of the other as its own
Articles of Incorporation
Mandatory requirements (under MBCA):
- name
- authorized shares
- registered agent
- incorporators
Permissive requirements (under MBCA):
- initial BOD
- statement of purpose
- class & series of shares
- D&O indemnification & liability limitations
Optional requirements (beyond MBCA): - Preemptive rights: the right to buy your proportional share of any new issue of your class of stock so as to keep their percentage ownership constant
Post-Incorporation Process
- Draft Bylaws (only for private corps)
- an internal roadmap for how the corporation will operate, and deal with things like the number and role of officers, procedures for filing board vacancies, calling meetings of shareholders and directors, etc. - First Organizational Meeting
- Adopt the initial bylaws
- Elect first BOD - First BOD Meeting
- issue stock
- appoint officers
5 attributes of a corporation
(1) Separate legal entity
(2) Limited Liability
(3) Separation of ownership & control
(4) Liquidity
(5) Flexible Capital Structure
Authorized Shares
the articles must specify the maximum number of shares the corporation is authorized to issue
Issued Shares
Shares that have been sold to shareholders
Outstanding Shares
Shares the corporation has sold/issued and not repurchased
Treasury Shares
Shares that were once issued & outstanding, but have been repurchased by the corporation
Issuance of Stock
BOD prerogative
SHs only involved if:
- BOD wants to sell more shares than authorized in AOI (AOI amendment requires SH approval)
- BOD wants to issue a new class of stock
*If the AOI authorizes the class of shares in question and there are sufficient authorized but unissued shares, the BOD is free to sell shares for any valid purpose as long as the corporation receives adequate consideration for the shares
Incorporation Process
- Draft Articles of Incorporation
- File Articles with SOS who approves with certificate of incorporation
- Post-Incorporation
- Draft bylaws
- First Organizational Meeting
- First BOD Meeting
Articles of Incorporation: Mandatory Requirements
- name
- authorized shares
- registered agent
- incorporator
Post Incorporation
- draft bylaws
- first organizational meeting
- first BOD meeting
First Organizational Meeting
- adopt bylaws
- elect first BOD
First BOD Meeting
- issue stock
- appoint officers
Who can adopt, amend or repeal bylaws?
Shareholders, but the BOD can vest this power is themselves in the AOI
- but this does not take away anything from SHs: a majority of the SHARES can repeal or amend a BL the BOD adopted
Bylaws
May contain any provision, not inconsistent with the law or the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers of its stockholders, directors, officers, or employees
- Have to be procedural & process-oriented in nature. Can’t contain substantive mandates
- can’t direct what actions the BOD and SHs can take - only how they take them
Enterprise Liability
Used to impose liability upon a larger enterprise when multiple smaller corporations are sister corps of a single enterprise. Depends on proof that the owner of multiple corporations did not respect the separate identities of the corporations.
Factors to consider in determining whether 2 or more corps have been operating as a single business enterprise:
- common employees
- common record keeping
- centralized accounting
- payment of wages by one corp to another corp’s employees
- common business name
- undocumented transfers
- same officers
- same shareholders
- same telephone number
- services rendered by the employees of one corporation to another
- unclear allocation of profits & losses between the corporations