Corporations Flashcards
Who is liable for pre-incorporation transactions?
Promoters (they are fiduciaries) unless a later novation.
The articles of incorporation must include
- Names, agents, addresses, purpose, shares
the name, the agents, names and addresses of incorporates, duration, the purpose (usually any lawful activity) and authorized shares
When is the corporation incorporated?
When the secretary of state accepts the fee and files the articles
If by laws and articles of incorporation conflict, which wins?
Articles
* the articles are the constitution of the corporation
What is the de facto corporation rule and corporation by estoppel?
- When a corporation isn’t properly formed but acts as a corp, it will be treated as a corp if there was a good faith attempt to incorporate and there was no actual knowledge of the faulty corporate status.
- If a 3rd party enters into a contract with corporation it can’t later get out of the K by asserting the corporation failed to form (estoppel).
What are the three factors to pierce the corporate veil, and what is meant by the term?
Generally, shareholders are not personally liable for corporate acts. However, a court may pierce the veil and reach shareholder assets if the corporate form is being misused (usually to avoid liabilities). The courts consider a totality of circumstances, including:
Alter ego (self-dealing or disregard of formalities) , undercapitilization, fraud… other shady jazz.
* look for only a few shareholders, and a general failure to respect or treat the corporate form as separate (fail to keep minutes, intermingling funds, etc). It’s harder to pull this off in a diffuse SH situation. Usually only a few SH.
What are issued shares?
Number of authorized shares actually sold
What are outstanding shares?
Shares that were once issued and remain in the possession of shareholders
What are treasury shares?
Shares one issued but subsequently reacquired by the corporation
Par value is?
The minimum value to sell a share at (it is not required)
* think golf. Except, in this case, it’s bad to go “under par.”
Watered stock is?
Stock sold for less than the par value. Shareholders who buy watered stock are liable to creditors of the corp.
How long is a stock subscription irrevocable for pre-incorporation?
six months— we don’t want people withdrawing their investments at the last minute. Need to line up investors.
Preemptive rights allow what
The person to maintain their percentage of ownership when new shares issue
Who can authorize dividends?
Directors unless would cause insolvency
* note that this is not a SH right so can’t be demanded by SH
Must every corp hold an annual meeting?
Yes.
And adequate notice must be given to SHs
Special meetings are for?
Voting on fundamental changes
Notice for meetings must occur?
no fewer than 10 days and no more than 60 days before the meeting
10-60 days before the meeting. Sufficient notice to warn, but not so much that everyone forgets about it.
Directors must set a record date when?
no fewer than 10 days before the meeting and no more than 70 days before the meeting
10–70 days before
A proxy must be?
In writing, signed by the shareholder as of the record date, sent to the secretary, state that it authorizes another to vote, and cannot be valid for more than 11 mos
Quorum of shareholders is?
A majority of the outstanding shares, not shareholders
Necessary vote of shareholders is?
A majority vote of those shareholders present (assuming a quorum was obtained)
Shareholders can inspect corp records so long as they?
State a proper purpose
* can’t be arbitrary or meant to harass.
Shareholders can sue
Directly or derivatively (on behalf of the corp)
Derivative lawsuits require
Claim made in corp name, stock ownership at time of suit, was a shareholder at time of harm, fairly represents interests of the corp, and made a demand to board unless it would have been futile
* these are lawsuits on behalf of the corporation.
A controlling shareholder may owe a duty to a minority shareholder if
controlling SHs (50+% or disproportionate owners of stock) have a duty to minority shareholders **not to abuse their power** or disadvantage minority SHs. \* this is a quasi fiduciary duty--- look for dealing with outsiders, selling their stock for cheap, etc.
For directors, a quorum is
A majority of the total number of directors
Ex: 4 of 7 total is sufficient. Only 3 of 4 would need to approve.
Directors may dissent and avoid liability by
Entering dissent in minutes of the meeting, filing a written dissent before the meeting adjourns, or provide a written dissent to the secretary
Directors and officers owe what to the corporation?
Fiduciary duties of care and loyalty.
Care/Prudence: Directors must act as an ordinarily prudent person, but may rely on outside reports and experts. This requires a duty to investigate before making important decisions. Must also apply any special skills or knowledge that they possess (legal/financial, etc).
Loyalty: Directors must act in the best interets of the corporation, and must avoid self-dealing. This means avoiding self-dealing and not usurping business opportunities.
* Safe Harbor : A transaction that might otherwise const. self dealing can be protected if: all material facts are disclosed (to disinterested sh
The business judgment rule is?
Absent fraud, illegality or self dealing, courts will not disturb good-faith business decisions
* this is a rebuttable presumption that the director reasonably believed his actions were in the best interests of the corporation. However, this presumption may be overcome if director: (1) was not acting in good faith; (2) was not reasonably informed; (3) acted out of self-interest (lacked objectivity); (4) failed to timely investigate; (5) other failures of prudence.
A self-interested transaction may be upheld if?
It is ratified by a majority of disinterested directors or shareholders.
Fundamental changes require approval of?
Both shareholders and directors
Merger is
when two or more corps combine and one survives assuming the assets and liabilities of the others
Consolidation is
the combination of two or more corps when neither survives and a new one is created assuming the assets and liabilities
Involuntary dissolution can occur by?
Creditors showing a corp is not paying its debts, shareholders show the corp is wasting assets, the directors are committing fraud, or the directors and shareholders deadlock
- failure to pay debts, or breach of fiduciary duty, or waste
Appraisal rights are?
When a shareholder dissents from a fundamental change he can demand his shares to be purchased by the corp for FAIR MARKET VALUE
LLCs require filing ___ and its owners are called ____ instead of shareholders?
An operating agreement; Members.
Discuss liability of LLCs
In order to be an LLC, articles of organization must be filed. . Generally, members are not liable for LLC obligations, but there is a possibility that the corporate veil will be pierced.
* don’t forget that in all partnerships, including LLCs members owe fiduciary duties of care and loyalty.
** can’t compete, usurp, and must act reasonably⇢subject to the business judgment rule
what are the 3 safe harbor defenses for breach of fiduciary duty
1-2: approval by disinterested shareholders or directors; “fairness” (3)
