Corporations Flashcards
Articles of Incorporation
- Name of corporation, cannot be similar to existing corporation.
- Number of authorized shares
- Also must include name and address of incorporated and registered agent.
Look for clause limiting corporation’s purpose, activities beyond the scope of purpose are ultra vires and may be enjoined or directors held liable for authorizing such acts.
When does corp existence begin?
- When articles filed by state.
- Promoters generally liable for preincorporation K’s. Liability continues even after corp formed absent a novation. Corp does not become liable unless it adopts.
What if there are defects in formation?
1A person who purports to act on behalf of a corporation knowing there was no valid incorporation is personally liable. Except:
- No liability if a defecto corp: (i) colorable compliance with incorp statute; and (ii) exercise corp privileges.
- No liability if a corporation by estoppel, people treating business as valid corporation are estopped from denying corporation’s existence.
- Where no corporation recognized, only those who acted on behalf of the business will be held liable; passive investors not liable.
Piercing the Corporate Veil
Theory 1: Alter Ego: Harm caused to third party because: (i) owners do not treat corp as separate entity; (ii) commingle personal and corp assets; (iii) use corp assets for personal purposes; and (iv) owners do not observe corp formalities or hold meetings. Parent and sub corps can be held liable FOR this.
Theory 2: Inadequate capitalization at inception. Corp must start with sufficient unencumbered capital to meet its prospective liabilities.
Theory 3: Fraud: Cannot be formed to avoid existing liabilities, but can be formed to limit future liabilities.
If pierced, generally: (i) only active shareholders liable; and (ii) only liable for tort obligations.
Capitalization of Corps
- Authorized but unissued shares
- Issued and outstanding
- Treasury shares, now called 1.
Preincorporation subscription agreements are irrevocable for 6 months.
Consideration for shares:
Acceptable Form:
- Under Model Business Corporations Act (“MBCA”) any benefit to Corp.
- Traditionally only cash, property, or services already performed.
Acceptable Amount:
- Under MBC amount set by directors, and their good faith valuation, is conclusive.
- Traditionally not less than par value.
Shareholders: Voting
Generally SH do not run C on a day to day basis, except in closely held corps where they may dispense with a board by SHA and run C through a different scheme.
SH indirectly control the corp by electing directors, amending bylaws, and approving fundamental changes.
Record Shareholders and Notice of Meeting
- Shareholders of record on the record date have the right to vote at the annual meeting to elect directors and regarding fundamental corp changes.
- Notice of meetings must be given to the SH as follows: Annual meeting, date time, location; Special meeting, date, time, location, and purpose. Improper notice: action taken at meeting can be nullified, or waived by attending without complaint.
Proxies
CA Law:
Written proxies valid for 11 months
Generally revocable unless they specifically provide otherwise and are coupled with an interest
May be revoked by attendance or later appointment.
Federal Law:
Proxy solicitations must fully and faithfully disclose all material facts
Prohibits material misstatements and fraud in connection with proxy solicitation
Materiality, a reasonable SH would consider it important in deciding how to vote.
Quorum
Generally majority of outstanding voting shares for a valid vote. Once quorum reached, SH leaving does not invalidate quorum.
Approval
MBCA: if quorum present, action approved if votes cast in favor exceed votes cast against
Cumulative voting for directors:
- MBCA allows articles to provide for cumulative voting.
- Cumulative voting is automatic in some states.
- Mechanics SH can vote shares owned multiplied by the number of directors being elected, can cast all votes for one candidate or split.
Shareholder Agreements
- Voting Trusts: SH transfer share ownership to a trustee who votes shares as agreed.
- SH management agreements: used in small corporations
- Share transfer restrictions. Restrictions must be reasonable and conspicuous.
Inspection Rights
Limited: books, papers, accounting, records. Available with five days written notice, and proper purpose (related to SH rights).
Unlimited: articles and bylaws, minutes of SH meeting, names and addresses of current directors, and recent annual reports.
Preemptive Right
Right to purchase shares to maintain proportionate ownership interest.
- Exists only if provided for.
- If provided for, does not apply to:
Shares for comp
Shares issued within 6 months of incorp
Shares issued for consideration other than money
Nonvoting shares with a distribution preference
Shareholder Suits
- Direct suit is to enforce right of SH. Recovery to SH.
- Derivative suit is to enforce right of the Corp. Elements: Must have owned shares at time of wrong, must maintain ownership throughout suit, and must make a demand on the board to bring suit. Recovery to corp.
Derivative suit may be dismissed upon showing that a majority of disinterested with no personal interest determine in good faith that suit is not in best interests of corp.
Distributions
Dividends or liquidity assets. No right to receive unless/until declared by board.
- Insolvency limitation: May not pay if C unable to pay debts as they become due OR if total assets less than total liabilities.
- Preferences: Pref shares may have preferences. Cumulative (accumulates until paid), Cumulative if earned (accumulates only if profits were sufficient to pay pref), Participating (preference and a share of the distribution made to common SH).
- Director liability:
(i) D who votes for unlawful distribution is personally liable for the excess
(ii) D may seek contribution from other directors who voted for distribution
(iii) D may recover from a shareholder who received a distribution knowing it was unlawful; and
(iv) Good faith defense, may rely on accountants or reliable officers and employees who indicate distribution is lawful.
Shareholder Liability
Generally not liability, not fiduciaries, may act in self-interest. Exception where there is a controlling SH, cannot use control to obtain special advantage at expense of minority SH’s.
Directors: Voting/Meetings
Meetings:
(i) D must attend in person (no proxies) or thrrough telecommunications equipment of all participating directors can simultaneously hear each other.
(ii) No particular notice required for regular meetings
(iii) special meetings typically require two days notice of date, time, and place (but not purpose)
(iv) quorum of directors must be present at time vote is taken
(v) approval of action requires affirmative vote of a majority of the directors present.
Business Judgment Rule
Protects directors from personal liability to corporations/shareholder.
- Director must act in good faith
- With care that an ordinarily prudent person in a like position would exercise, and
- In a manner reasonably believed to be in the best interests of the corporation.
Articles Limiting Director Liability
Articles may further limit or eliminate director personal liability to corporation or shareholders except:
- To the extent D received improper benefit
- For liability for unlawful distributions, or
- For intentionally inflicted harms or criminal violations of law.
Reasonable Reliance
Director may defend suits with a claim of reasonable reliance on opinions, reports, etc., prepared by experts or reliable employees.
Waste
D duty to prevent corporate waste.
Duty of Loyalty/SelfDealing
The D owes a duty of loyalty to the corporation and must avoid self-dealing without disclosure and approval. A transaction between a corporation and a director will NOT be set aside for self-dealing if:
- Director discloses all material facts, and transaction was approved by disinterested directors or shareholders; or
- It is fair to the corporation.
Corporate Opportunity Doctrine
A D may not divert to himself a business opportunity within the corporation’s line of business without first giving the corporation an opportunity to act.
The remedy is recovery of D’s profits or forcing D to convey the opportunity to the corp.
Indemnification
- If a D is sued as a D and is successful, corp must indemnify for expenses.
- If D is sued as a D and is unsuccessful corp has discretion to indemnify if D complied with BJR; except where found liable to corp or received an improper benefit, then you get nothing.
- Corps may purchase liability insurance for D’s even if they would not be entitled to indemnification under the circumstances.
