corporations Flashcards
formation of corporation
de jure corporatoin = properly formed corporation
requires
filing articles of incorporation that contains corp name, number of shares, address and name of initial registered agent and name and address of each incorporator, and properly filing it in the state
articles of incorporation control where conflict with bylaws
corporation begins on date it is properly filed unless delayed effective date is specified (RMBCA doesnt allow delayed start date)
bylaws
rules and regulations adopted by BOD that govern internal operations of corp
RMBCA –> bylaws may contain provision not inconsistent with the articles or law of jxn
amending bylaws
shareholders - may amend or repeal
BOD - may amend or repeal unless
- articles exclusively reserve power to SH or
- SH (in amending bylaw) expressly provides that BOD cannot amend or reinstate that specific by law
if the bylaw deals with director nomination procedures the BOD retains the power to safeguard the voting process, but cannot repeal shareholder-approved bylaw
powers of a corporation
a corp has the power to do all things necessary or convenient to carry out its business and affairs
includes –> lawsuits, own or lease property, incur liabilities, make investments, fix compensation/salaries, charitable donations, pay/engage in lobbies
foreign corporation
a corporation in another state or jxn
foreign registration statement – must be filed with the secretary of state to do business in another state
governing law – law where corp is formed governs both internal affairs of corp and interest liability of SH
formation of an LLC
articles of incorporation - an LLC is formed when the articles are properly filed with state and LLC has at least one member
operating agreement - governs the relations b/t members and LLC, rights/duties of managers, activities & affairs of the LLC and any means and conditions for amending the operating agreement
liability of promoter
promoter acts on behalf of a corp that has not yet been formed
a promoter is personally liable when
- he purports to act as or on behalf of a corp and
- knows no corp was formed
a promoter remains personally liable for a pre-corp k even if the corp subsequently adopts the k
- both corp and promoter will be liable if k is adopted
the promoter is not liable if
- there is a subsequent novation or
- the k explicitly provides that the promoter has no personal liability
liability of corporation for k made by promoter
a corp is NOT liable on k made by promoter unless the corp expressly or impliedly adopts the k post incorporation
express adoption - BOD action or reference in corp formation doc
implied adoption - corp knows/has reason to know that material terms of the k AND accepts some benefit of it
defenses to owner liability for acts made during defective incorporation
if corp formation is defective, the owners may be personally liable for corp k and obligations
exceptions:
1. RMBCA - prevents personal liability unless the person purports to act as or on behalf of corp knowing that no corp was formed
- de facto incorporation - exists when the entity made a good faith attempt to incorporate, is eligible to incorporate, and took action that it considered itself a corporation
* this doctrine only prevents personal liability of a person unaware that a corp wasn’t properly formed - incorporation by estoppel - a person/entity may be estopped from denying that a business is a corp when it treated the business as such *does not apply to torts
SH/officer/director personal liability
generally, SH are not personally liable for corp liabilities and obligations but a court may pierce veil to impose personal liability in certain situations
courts may pierce the veil and hold individual shareholders, officers, or directors personally liable for actions taken on behalf of corp when
- corp is acting as alter ego of the shareholder (when she/he utilizes the corp veil for personal reasons)
- there is failure to follow corp formalities
- corp is inadequately capitalized at its inception or
- to prevent fraud
* courts are more likely to do so in tort actions
piercing corp veil for LLC
generally same factors as for corp but failure to follow formalities is not a ground to pierce LLC
common vs. preferred shares
common = provide SH with voting rights preferred = do not have voting rights
generally, preferred provides a SH the preferred right to an asset distribution before SH with common shares
if only one class of shares –> all shares will have both the power to vote and the power to receive the net assets upon dissolution
if more than one class of shares is authorized –> the classes must be described in the articles. all shares within a class must have the same rights, privileges, and restrictions but RMBCA allows variations within a class/series if expressly set forth in articles
authorized shares
maximum number of shares a corp can issue
outstanding shares
total number of shares issued by the corp and held by SH
each share is entitled to one vote unless otherwise specified
reacquired shares aka treasury shares
considered authorized, but are not outstanding (b/c corp owns them, not SH)
reacquired shares are not allowed to be voted
consideration for shares
RMBCA allows shares to be issued for any type of consideration
BOD determines the value of non-monetary consideration. absent fraud or bad faith their determination is conclusive
dividend distribution to shareholders
distributions are declared at the discretion of the BOD (protected via BJR)
once a dividend is declared, the SH has a legal right to distribution
SH do not have the right to compel a distribution, unless such a right is expressly granted in articles
- but a court will interfere and compel a distribution upon a showing of bad faith or dishonest dispute and that funds were available
SH meetings - right to vote and record date
only registered shareholders on the record date are entitled to vote at the shareholders meeting (even if a SH sells the shares before the meeting - unless a proxy is given to the buyer)
- record date cannot be more than 70 days prior to the SH meeting
proxy voting
a proxy grants the proxy holder the ability to vote shares as the proxy holder deems appropriate
must be signed on either an appointment form or electronic transmission
only valid for 11 months
proxy agreements
freely revocable by the SH, even if the proxy states that its irrevocable
may be revoked expressly or by showing up and voting
exception: not revocable if proxy is coupled with an interest or legal right and states that it is irrevocable
annual meetings
corp must hold annual meeting of SH at date/time stated in bylaws
directors are usually elected at the annual meeting
special meetings
may be called by BOD, persons authorized under articles or SH holding at least 10% of all votes entitled to be cast at meeting
notice must be given to all SH entitled to vote AND requires
- at least 10 days but not more than 60 days notice
- meeting date, time, place AND
- meeting purpose
if meeting involves a fundamental change, all SH (regardless of voting ability) are entitled to notice
waiver of notice
a SH may waive notice in signed writing or by attending the meeting and not objecting at beginning (or not objecting in clear manner)
quorum
needed for shareholders to take action at meeting
requires majority of shares entitled to vote
voting w/ quorum on matter
if quorum exists, then action on a matter (other than election of directors) is approved by majority of votes cast in favor unless articles require greater number
- each outstanding share gets one vote unless article says otherwise
election of directors
plurality voting - candidates who recieve the most votes elected to BOD, as long as there is quorum shareholders present
– majority of vote is not necessary to be elected (in most states)
cumulative voting - articles or bylaws may provide for cumulative to elect BOD. under this, SH total number of votes = shares owned x director spots open
– example: 100 shares owned x 3 BOD = 300 votes
SH may cast all votes for one director nominee (i.e., 300 votes) rather than being limited to max number for each nominee
under cumulative voting, a director can be removed only if the number of votes for removal are greater than those needed to elect him
SH right to inspect books
RMBCA – SH has right to inspect and copy corp accounting records, excepts of BOD meetings, and the record of SH if:
- made during reg business hours at reasonable location (spec by corp)
- with 5 days written notice
- made in good faith and for proper purpose
- described in the purpose with particularity
- the requested records are directly connected with the purpose
SH may inspect the following without proper purpose
- articles
- bylaws
- BOD resolutions on classification of shares
- minutes of SH meetings for past 3 years
- name and business address of current BOD and officers and
- most recent annual report
SH voting agreement
RMBCA - SH may sign agreement providing how they will vote their shares
it is specifically enforceable and claim for breach of k may be brought to enforce
SH right of expression and proposed resolutions
submitting a proposed resolution at SH meeting is generally accepted but a corp may exclude improper proposals
- non-binding/precatory proposals = proper
- binding proposals = not proper unless for corporate action by amending bylaws
BOD meetings
can only act if a quorum is present at time vote is taken
quorum = majority of directors unless a higher or lower number is required by articles (articles cannot lower less than 1/3 of BOD)
BOD may permit participation of a director by any means of communication but all directors must be able to simultaneously hear each other
BOD voting
if quorum is present, then act is approved by affirmative vote of majority of directors present at meeting unless greater number is required by the articles or bylaws
BOD notice and waiver of meetings
regular meeting – may be held without notice
special meeting – requires 2 days notice of date, time, place of meeting
waiver - director may waive notice in signed writing or if director attends meeting (unless he objects at beginning of meeting upon arrival and does not vote)
BOD action without meeting
BOD may take action without meeting if all directors sign a consent describing action and deliver it to corp
removal of director
RMBCA - SH may remove director with or without cause UNLESS articles require cause
common law - only remove director for cause
authority of officers
actual - officers have authority to act consistently with their duties as outlined in bylaws or as provided by the BOD
apparent authority - officers may bind the corp when a third party reasonably believes the person has authority and that belief is traceable to corp manifestations (holding officer out as having authority)
president and secretary authority
president –> authority for matters within ordinary course of business but not extraordinary acts
secretary –> authority to maintain and authenticate records of company
removal of officers
officers may be removed at any time with or without cause by
- BOD
- Officer who appointed such officer, unless bylaws or articles provide otherwise
- any other officer, if authorized by BOD or bylaws
management of LLC
member-managed = LLC is presumed to be member-managed
manager-managed = to be manager managed, the operating agreement must state that LLC is so – it is run by an elected group of managers (similar to BOD)
authority of member/managers in LLC
under RULLCA and general agency principles, each member has authority to bind LLC for business purposes
express actual authority - members receive such authority from operating agreement or from managing members/managers
- differences among members for acts within ordinary course of business –> only need to be approved by majority of members
- acts outside ordinary course of business –> may be undertaken only with consent of ALL members
implied actual authority - have authority to take actions that are reasonably incidental or necessary for the person authorized duties
apparent authority - each member of an LLC can bind the LLC if the action is made in the ordinary course of business unless the member lacked authority and the other party had notice of lack of authority
managers in manager-managed LLC have similar authority
preemptive rights
allows existing SH to maintain her % of ownership by being offered the opportunity to purchase shares issued for cash before outsiders are permitted to purchase
RMBCA –> SH do not enjoy preemptive rights unless explicitly granted in articles
preemptive rights do not apply to shares issued as compensation, to satisfy conversion/option rights create to provide compensation, within 6 months of incorporation, for consideration other than cash, or without general voting rights, but with preferential rights to distributions
SH common stock do not have preemptive rights with respect to preferred shares unless the shares are convertible into common shares
restrictions on share transfers
articles, bylaw, and/or shareholder agreements may imposed restrictions on transfer of shares for any reasonable purpose, to preserve exemptions under federal/state securities law, or to maintain status when dependent on number or identity of SH
*absolute restraint is invalid
reasonable restrictions may be imposed against transferor but they cannot be enforced against transferee unless the restriction was conspicuously noted on the stock certificate or the transferee had actual knowledge of the restriction
BJR
a court will not disturb decisions subject to the BJR standard if a rational business purpose exists. directors must be reasonably informed on the decisions they make. they may rely on the reasonable advice of advisors if the reliance was reasonable and the advisor or committee was qualified
director duty of care
use care that a prudent person in like position would reasonably believe approrpate under the circumstances
burden is on P
duty of care is breached by:
- nonfeasance: director does nothing where he is expected to act –> only breached if P can show causation/harm to company
- misfeasance: board makes decision that is harmful to corp. –> no causation issue, but there is no breach if director meets BJR
BJR directors must discharge their duties in good faith, with reasonable belief that they are acting in best interest of corp, and with the care that a person in a like position would reasonably believe appropriate under like circumstances
*if the 3-part test above is met, then a director is NOT liable (BJR)
if director breaches the duty of care, he may be personally liable to the corp for any losses that result
duty of loyalty directors
directors must act in the best inerests of the corp and without personal conflict
burden is on D
forbids a director from:
- entering into conflicting interest transactions: interested director transaction will be set aside unless director can show it was fair when entered into or relevant facts were disclose and approved by majority of disinterested directors (at least 2) or disinterested SH
- usurping a corporate opportunity
- competing with the corporation or
- trading on inside information
conflicting interest transactions
is a breach of the duty of loyalty unless
- approved by a majority of disinterested directors after full disclosure of all relevant material facts
- approved by a majority of disinterested shareholders or
- the transaction as a whole was fair to the corp at the time it was entered into (fair price + beneficial to corp + fair dealing)
* BJR does not apply/protect directors financially interested in a transaction or who engaged in fraud/illegality
a conflict occurs when a director/officer (or their family member):
1. is a party to the transaction
2. has a beneficial interest in the transaction or is so closely linked to it that the director’s judgment may reasonable be affected or
is involved with another entity that is conducting business with the corp and that transaction would normally be brought before the BOD
loan to director
can be done if reasonably expected to benefit the corp
i.e., money to director to pay for additional school
usurping a corporate opportunity
is a breach of the duty of loyalty unless:
- first presents opportunity to the corps BOD and
- BOD decides not to pursue the opportunity
* showing that the corp was not financially able to take the opportunity is not a defense
a corporate opportunity is any opportunity that a corp has an interest/expectancy in or is in the corp line of business
*a parent corp has some freedom in allocating an opportunity within a corporate group
fiduciary duties of shareholders
SH generally do not owe fid duties to fellow SH
- close corporation exception –> SH in a close-corporation owe the fid duties of loyalty and good faith & fair dealing to minority SH (like a partnership)
- controlling SH exception –> controlling SH owe fid duties to other SH and the corp partially owned subsidiaries
restricting fid duties - corporations
RMBCA –> articles may eliminate or limit the personal liability of a director for actions taken or not taken
but, the following cannot be limited: financial benefits improperly received, intentional infliction of harm to corp or SH, unlawful dividends or an intentional violation of criminal law
fiduciary duties owed by LLC members/managers
member-managed –> members owe the duty of care and loyalty to both the company and other members
duty of care –> member must act
- with the care that a person in a like position would reasonably exercise under circumstances and
- with a reasonable belief to be in the best interests of the company
duty of loyalty –> includes duty to
- account for any property, profit, or benefits derived from LLC business or property
- refrain from having an adverse interest when dealing with the LLC (unless the transaction was fair) and
- refrain from competing with the LLC (before dissolution)
* *exception –> all members authorize an act/transaction after receiving full disclosure
manager-managed LLC –> the managers owe fid duties, not the members
the duties are the same as a member-managed LLC
BUT two notable difference for the duty of loyalty: only the members (not managers) may authorize an act/transaction that would otherwise violate the duty of loyalty; managers must refrain from competing with the LLC until winding up is completed (the duty does not end upon dissolution)
restricting fid duties – LLC
RULLCA –> the operating agreement may do the following so long as its not manifestly unreasonable:
- restrict/eliminate the duty of loyalty
- set forth activities that do not violate the duty of loyalty
- alter the duty of care (but it cannot authorize intentional misconduct or a knowing violation of law)
- alter/eliminate any other fid duties and
- set forth standards to measure the duty of good faith & fair dealing
direct action – SH
may be brought when there is a breach of duty owed to a shareholder of a corp. the injury cannot be solely the result of an injury suffered by the corp
– similarly, a member of an LLC may bring an action against a member, manager, or the LLC (same standard for showing of injury)
**damages awarded will go to the SH or member
derivative action – SH
when a SH is suing to enforce the corp claim
the RMBCA requires the SH to
- own the corp stock at the time the claim arose or became a SH by operation of law from such a SH
- be a SH through entry of judgment
- fairly and adequately represent the corp interests and
- make a written demand to the corp to take suitable action
a derivative suit cannot be commenced until 90-days after the demand, unless the corp
A. rejects the demand or
B. will suffer irreparable harm if forced to wait
for an LLC, all elements are the same except
- the action may be brought within a reasonable time after the demand and
- the demand requirement may be waived if futile
damage award –> is paid directly to corp/LLC, but the SH/member may recover reasonable costs of the litigation
dismissal of derivative action by BOD
a derivative action must be dismissed on motion by the corp if
- majority of the BOD qualified directors
- have determined in good faith
- after conducting a reasonable inquiry and
- that the action is not in the best interest of the corp
federal securities law - rule 10b-5
P must show that
- D engaged in a fraud scheme or device
- which was relied upon by P
- in connection with the purchase or sale of securities
- D acted with scienter
- D used some means of interstate commerce and
- P suffered damages
fraudulent scheme includes: misrepresentation of material fact or disseminating such information, insider trading, or tipping (trading on material info received from an insider)
P must be either the SEC or connected to purchase or sale of the securities at issue
amending articles of incorporation
may be amended at any time by
- adoption by BOD
- notice to all SH of a meeting to vote on the amendment and
- adoption by the SH by majority vote - unless the greater number is required under state law or articles
exception:
1. BOD has authority to make general minor changes without SH approval
2. BOD or incorporators may adopt any amendment if the corp has not issued shares yet
merger
the BOD of both corporations must first approve merger with majority vote, then SH of both must approve by majority vote
SH approval is not required if
- articles will not be changed
- outstanding shares will not change AND
- voting power of any shares issued as result of merger is 20% or less of surviving corp
short form merger
occurs when parent corp merges with subsidiary, and the parent corp owns at least 90% of subsidiary outstanding shares. in such case, only BOD of parent corp has to approve merger
share exchange
the BOD of both corp must first approve, then SH of acquired corp must approve with majority vote
SH approval of the acquiring corp is NOT required
sale of all or substantially all of corp assets
deemed a funamental change if the same is NOT in usual and regular course of business
making fundamental changes to corp
requires
- adoption by BOD
- notice to all SH - must state purpose of meeting
- adoption by SH by majority vote - unless greater number required under state law or in articles
majority vote of SH is not required if sale of assets/fund change is in usual and regular course of business
SH dissenter of fundamental change to corp appraisal rights
a dissenting SH is entited to apprasial rights (to obtain payment for FMV of shares) for any of the following fundamental changes
- SH has the right to vote on merger plan
- SH of subsidiary in a short form merger
- SH shares are being acquired in a share exchange
- SH has right to vote on the distribution of all or substantially all assets
- if an amendment of articles materially and adversely affects the SH rights
procedure to enforce SH appraisal rights
dissenting SH may force corp to purchase shares if
- he gives notice to corp of his intent to assert appraisal rights before the vote
- fundamental change is effectuated and
- the SH did not vote in favor of the change
* *Appraisal rights are not available to SH of publicly traded companies
judicial dissolution of corp
SH may petiton court to dissolve corp if
- deadlock of directors and irreparable injury to corp
- directors acted in manner that is illegal, oppressive, or fraudulent (violating SH reasonable expectation or preventing minority SH from having equal rights/opp)
- SH are deadlocked in voting power and have failed to elect directors for at least 2 consecutive annual meetings OR
- corp assets have been wasted or misplaced
election to purchase shares in lieu of dissolution
corp or SH may elect to purchase all shares owned by SH petition for dissolution at FMV
this election is generally irrevocable
voluntary dissolution of corp
corp will be voluntarily dissolved if
- BOD adops a proposal to dissolve
- notice to all SH - must state purpose of meeting and
- adoption by SH by majority vote - unless greater number required under state law or articles
early dissolution - a corp may be dissolved by majority of incorproators or initial directors if
- corp has not issued shares or commenced business and
- articles of dissolution are filed with secertary of state
dissociation of a member from an LLC
member has right to dissociate, rightfully or wrongfully, at any time, and occurs when LLC has notice of persons express will to withdraw
dissociating member loses the right to participate in management of LLC but he still has right to receive distributions
RULLCA –> dissociation does not result in dissolution of LLC
dissolution of LLC
dissolution events under RULLCA - dissolution upon
- occurrence of dissolution event in operating agreement
- consent of all members
- passage of 90 consecutive days where the LLC has no members or
- judicial dissolution
judicial dissolution - court may grant this upon showing of any of the following:
- managers or controlling members acted in illegal/fraudulent manner
- managers or controlling members acting in an oppressive and directly harmful manner to member
- the conduct of all or nearly all of LLC activities is unlawful or
- it is not reasonably practicable to carry on the business
indemnification
corp must indeminify: successful defense - if director/officer is successful on merits or otherwise, corp must indemnify for expenses
corp may indemnify: unsuccessful - if director/officer is unsuccessful in defending, corp may indemnify if director/officer complied with BJR – this is a catch all - i.e., if d/o settled or otherwise dismissed case but was not on merits, corp may indemnify
corp cannot indemnify: where d/o is found liable to corp or received improper benefits
–> determined by disinterested directors or outside counsel
creditors seeking dissolution
o A corporation has admitted in writing that creditors’ claim is due and owing and the corporation is insolvent or
o The creditors claim has been reduced to judgment, execution of judgment has been returned unsatisfied, and corporation is insolvent
