Corporations Flashcards
Formation of Corporation
Creation occurs on date that articles of incorporation are properly filed
De jure – corporation with properly filed articles of incorporation according to requirements (name of corporation; number of shares authorized to issue; address and name of initial registered agent; and name and address of incorporators)
Ultra vires acts are acts that are conducted by a corporation that does not comply with or go beyond the stated purpose on its articles of incorporation. They are illegal and could give rise to piercing the corporate veil if undertaken
De facto – corporation that isn’t properly filed but the parties made a good faith attempt to properly filed in compliance with statute and begin to conduct themselves as if they are a legitimate, validly incorporated corporation
Corporation by estoppel – if someone detrimentally relies on someone else conducting business as if they are a valid corporation, the corporate person is estopped from claiming that it is not a valid corporation
Creation of LLCs
Limited Liability Companies are formed upon proper filing of Articles of Organization and it has at least one member
Liability of Corporations
Piercing the Corporate Veil – Court may pierce the corporate veil of a corporation and expose shareholders to personal liability for actions taken on behalf of the corporation if:
- corporation acts as alter ego of the shareholder (use of corporation for personal reasons)
- failed to follow corporate formalities;
- undercapitalization; OR
- fraud prevention
Shareholders and members are liable for their own torts
Shareholders
Shareholders are entitled to distribution of dividends, but the Board of Directors has discretion to distribute
Only registered shareholders are entitled to vote at meetings
Shareholders can vote by proxy or in person – if by proxy, they can revoke that agreement at any time unless the proxy gave consideration and states its irrevocability
Quorum is required at meetings and a majority of those in attendance is required to pass a vote
Elect Board of Directors by either plurality or cumulative
Shareholder Right to Inspect Records and Books
Right to inspect books and records if 1) during business hours at reasonable location; 2) with 5 day notice; 3) request made in good faith with proper purpose; 4) request describes particular purpose; and 5) requested records are directly connected with purpose
Proper purpose not required to inspect:
- AOI
- Bylaws
- BoD resolutions on share classification;
- Minutes of SH meetings;
- Name and business addresses of current directors;
- Most recent annual report
Directors
At least one director required
Can be removed by SHs without cause
Meetings required unless all directors consent in writing to act without meeting
Quorum required to transact business – majority required to vote to act
Director Duty of Loyalty
- No self-dealing – conflict arises where director gets unfair benefit from transaction with own corporation
- There is a conflict of interest if director knows that he or related person is 1) a party to the transaction; 2) that director has beneficial financial interest in transaction (or reasonable expectation of financial interest); or director is a partner, agent, or eployee of another entity the corporation is transacting with
- can be okay if director gets permission of a majority of disinterested directors or shareholders
Director Duty of Good Care
- must perform their duties in good faith with such case as an ordinarily prudent person in their position or like circumstances would behave
- must act in best interest interests of the corporation
Business Judgment Rule – a business judgment is presumed to be an informed judgment (rebutted if decision was unadvised or uninformed or made in bad faith, such as a conflict of interest or fraud)
Limited Liability Company
LLCs are either member-managed or manager-managed
If their articles of organization or operating agreement doesn’t state otherwise, the default is that an LLC is member-managed, which means that all the members owe fiduciary duties to the LLC and the members
Fiduciary duties – loyalty and care
Member-managed – only members are allowed to authorize a transaction/act that would violate duty of loyalty
Other Shareholder Rights
Derivative suits – Shareholders have the right to bring derivative suits against the directors on behalf of the company when the directors and/or officers act in a way that is not in the best interest of the corporation and that they failed to enforce
They must first demand that the directors/officers act to remedy that issue and receive a rejection before bringing suit
Demand not required if it is clear that it would be futile or that the directors/officers are interested in the challenged issue or were not fully and appropriately informed of the transaction before engaging in it
If suit is successful, recovery goes to the corporation, and the SH gets reimbursed for fees and costs
Direct suits – SHs may bring direct suits against the corporation or directors/officers for personal breaches of duty against them
Fundamental Changes
Directors must call meetings for SHs and everyone to vote on fundamental changes to the corporation – SHs must have majority for the change to occur
Fundamental changes include
- Amending AoI
- Mergers
Mergers
Mergers are considered fundamental changes to a corporation and as such require the majority of SHs to vote in favor
Short merger– if the parent company has already absorbed at least 90% of the subsidiary – only directors have to approve the merger
SHs approval of regular merger not required if AOI won’t be changed; outstanding shares won’t change
Dissenter SH’s Rights
Dissenting SHs are entitled to appraisal rights (FMV for his shares) for the following:
- right to vote on merger plan
- short form merger
- shares are being acquired in share exchange
- right to vote on distribution of all or substantially all corporate assets
- material and adverse affect to their rights due to amendment of AOI
Can enforce appraisal rights by:
- notify corporation of intent to assert appraisal rights
- notify before vote
- fundamental change occurs; and
- SH didn’t vote in favor of the change
Dissolution and disassociation
Corporations may be judicially dissolved
may be dissolved voluntarily
- BoD adopts proposal to dissolve
- notice to all SHs; and
- adopting by SHs majority vote
Disassociation
An LLC member has right to disassociate at any time with express will to withdraw and notification to LLC – still retains right to distributions
LLC may be dissolved in these ways:
- occurrence of event
- consent of all members
- 90+ days with no members
- judicial dissolution (for a - members or managers acting illegally or fraudently; b) acting in oppressive and directly harmful manner to other members; c) conduct of all or substantially all LLC activities illegal; or d) not reasonably practical to continue operating
