Corporations

Question 1

Corporate formation

Answer 1

Person, paper, and act.

Incorporators undertake to form the corporation. They must comply with all statutory requirements to form the corporation. They execute and deliver the articles of incorporation to the secretary of state and pay the required fees.

Corporate existence begins upon the filing with the state.

Question 2

Articles of Incorporation

Answer 2

Name of the corporation- must include corp. co., inc. or ltd.
Name and address of each incorporator
Registered agent and street address of the registered office in the state of incorporation.
Information regarding the corporation’s stock (number of shares, classes of shares)
Purpose statement in some states- otherwise presumed all lawful business

Question 3

Ultra vires acts

Answer 3

Now, corporations usually can do any lawful activity. But if the corporation’s articles include a narrow business purpose, anything outside that purpose is an ultra vires act.

Shareholder can sue to enjoin, corporation can sue officer or director for damages for approving, and state can bring an action to dissolve a corporation.

Question 4

Organizational meeting

Answer 4

(1) adopt bylaws- can contain any provision for managing the corp that isn’t inconsistent with the articles or law
(2) appoint officers

If the initial directors are named in the articles they hold the meeting. If not, incorporators hold meeting.

Question 5

De facto corporation

Answer 5

Incorporators can still get limited liability if they failed to form a corporation de jure but they formed a de facto corporation. Need:

• relevant statute
• Good faith, colorable attempt to comply with the statute
• exercise of corporate privileges (parties were acting as though they were a corporation)

Can only be raised as a defense by a person who is unaware that there was no valid incorporation.

Note this and corporation by estoppel are abolished in many states. But address if it comes up.

Question 6

Corporation by estoppel

Answer 6

Persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.

Applies only in contract cases, not torts.

Question 7

Promoters

Answer 7

People who are eliciting financing and making contracts in anticipation of making a corporation. Corporate entity not bound on contracts entered into by the promoter in the corporate name prior to incorporation. Corporation may become liable only if it expressly or impliedly adopts the promoter’s contract.

Express adoption- board takes action adopting the contract.
Implied- accepts a benefit of the contract

Promoter is personally liable and remains liable after corporation is formed even if the contract is adopted. Only released from liability if there is an express or implied novation.

Owe duty of fair disclosure and good faith to the corporation.

Question 8

Shares

Answer 8

shares described in corporation’s articles are authorized shares. Shares that have been sold are issued and outstanding.

Issuance is when a corporation sells its own stock.

Question 9

Subscriptions

Answer 9

Written offers to buy stock from a corporation.

Preincorporation subscriptions are irrevocable for six months unless otherwise provided in the terms or unless all subscribers consent to revocation.

Postincorporation subscriptions are revocable until accepted by the corporation.

Consideration- stock may be issued for any tangible or intangible property or benefit to the corporation. Money, property, services already performed, discharge of debt, promissory notes and future services to the corporation.

Question 10

Par

Answer 10

Minimum issuance price. Stock cannot be issued by a corp for less than the stated par value. Watered stock occurs when par value stock is issued for less than its par value. Directors will be liable for the water if they knowingly authorized the issuance. Purchaser also charged with notice of the par value.

no par means no minimum issuance price. Board can have the stock issued for any price it sets.

MBCA has generally done away with par value concept. Whatever consideration directors deem appropriate. Board’s valuation conclusive if made in good faith.

Question 11

Preemptive rights

Answer 11

Right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money.

Articles must stipulate that this right exists.

Limitations

• no preemptive right where shares issued for consideration other than cash
• within 6 mos of incorporation
• without voting rights but having a distribution preference

Question 12

Directors

Answer 12

Directors must have legal capacity. There must be more than one. Number can be set by articles or bylaws. Initial directors named in articles or at organizational meeting. After that shareholders elect.

Entire board is elected each year at shareholder’s meeting unless staggered board. Shareholders can remove with or without cause.

Question 13

How can directors act on corporation’s behalf

Answer 13

Unanimous agreement in writing or at a meeting that satisfies quorum and voting requirements.

No notice required for regular director meetings. For special meetings, at least two days’ written notice of date, time, and place is required. Failure to give notice means that whatever happened at the meeting is voidable. Or even void, unless directors who were not notified waived in writing or attend the meeting without objecting at the outset of the meeting.

Must have a quorum at the meeting (majority of all directors) unless bylaws say otherwise but cannot be less than 1/3. If a quorum is present, passing a resolution requires only a majority vote of those present. Quorum can be broken if people leave the meeting.

Question 14

Committees

Answer 14

Board can creat commmitees with one or more members but committees cannot:

• declare a distribution
• fill a board vacancy
• recommend a fundamental change to shareholders

but can recommend such actions to the full board for its action

Question 15

Director fiduciary duties

Answer 15

Director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation (duty of loyalty). She must also use the care that a person in like position would reasonably believe appropriate under the circumstances (duty of care).

Nonfeasance- when director does nothing. A lazy director. Only liable if breach causes a loss to the corporation. Need the action to cause the loss which can be hard to prove.

Misfeasance occurs when the board makes a decision that hurts the business. Causation will be clear.

Question 16

Business judgment rule

Answer 16

Only applies in duty of care cases.

Directors who meet the standard of care will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous. Board that does some homework will not be liable for bad results.

Burden on plaintiff to show that the board either did not do appropriate homework or did something very stupid.

Court will not second guess business decisions made in good faith, informed, and with rational basis.

Question 17

Director relying on outside information

Answer 17

Director can rely on information, reports, or statements including financial statements prepared or presented by

• corporate officers or employees who they reasonably believe to be reliable and competent
• legal counsel, accountants or other people the director reasonably believes are professionally competent
• committee of the board of which the director is not a member if the director reasonably believes the committee merits confidence.

Question 18

Duty of loyalty cases

Answer 18

Business judgment rule does not apply because these cases are about conflicts of interest. Interested transactions, competing ventures, and corporate opportunity doctrine.

A conflicting transaction will not be enjoined, set aside, or give rise to damages because of the director’s interest if:

(1) it was approved by a majority (at least two) of disinterested directors. All material facts must be disclosed or known (cannot include shares or votes by the interested director) OR
(2) it was approved by a majority of votes entitled to be cast by disinterested shareholders. disclosure of facts must be known and transaction must be described in notice of shareholders’ meeting OR
(3) judged by the circumstances at the time the corporation entered into the transaction, it was fair to the corporation.

Question 19

Corporate opportunity doctrine

Answer 19

Director cannot usurp a corporate opportunity. Director cannot take it until he (1) tells the board about it and (2) waits for the board to reject the opportunity.

A corporate opportunity is something the corporation would have an interest or expectancy in. The closer the opportunity is to the corporation’s line of business, the more likely a court will find it to be a corporate opportunity.

Corporation’s lack of financial ability to take advantage is not a defense.

Damages are constructive trust to transfer property to the corporation or recovery of profit made.

Question 20

Duty to disclose

Answer 20

Directors have a duty to disclose material corporate information to other members of the board.

Question 21

Limitation of director liability

Answer 21

Articles can limit or eliminate directors’ personal liability for money damages to corporation or shareholders. But cannot eliminate liability for

• financial benefits received by the director to which she is not entitled
• intentionally inflicted harm on the corporation or its shareholders
• unlawful corporate distributions
• intentional violation of criminal law

Question 22

Which directors are liable?

Answer 22

Director is presumed to concur with board action unless dissent or abstention noted in writing.

• written in meeting minutes
• delivered in writing to the presiding officer at the meeting or
• written dissent to corporation immediately after the meeting

Oral dissent not effective. Cannot dissent after the fact if you dissented at the meeting.

Not liable if you were absent from the meeting.

Question 23

Officers

Answer 23

Officers are agents of the corporation. Actual or apparent authority agency rules determine whether they have authority to act.

Officers are selected and removed by the board. Corporation can remove officers at any time, with or without cause.

Question 24

Indemnification

Answer 24

Corporation cannot indemnify a director who is (1) held liable to corp or (2) held to have received improper benefit.

Unless limited in articles, corporation must indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses including attny fees.

Corporation may indemnify a director for reasonably litigation expenses incurred in unsuccessfully defining a suit brought against director if the director (1) acted in good faith and (2) believed her conduct was in the best interests of the corporation.

Question 25

Shareholders and piercing the corporate veil

Answer 25

generally do not have management power

Can be held liable if court pierces the corporate veil of a closely held corporation.

(1) abused privilege of incorporation and
(2) fairness requires holding them liable.

Three common scenarios
-alter ago. shareholders ignore corporate formalities such that the corporation is the alter ego or a mere instrumentality of the shareholders or another corporation. Treating corporate assets as your own, comingling, etc.

• inadequate capitalization. not enough unencumbered capital at the time of formation to reasonably cover prospective liabilities.
• fraud, avoiding existing obligation, evasion of statutory provisions

More likely to pierce in torts cases than contract cases. Most courts will only hold active shareholders liable.

Question 26

Derivative suit

Answer 26

Shareholder suing to enforce the corporation’s claim.

Duty of care or loyalty suits will always be derivative because these duties are owed to the corporation, not the shareholders.

If a shareholder brings a derivative suit and loses, other shareholders are barred from bringing suit on the same claim.

Requirements:

• standing (stock ownership at time of wrong)
• fairly and adequately represent the corporation’s interest
• must make written demand on corporation/board to take suitable action. then wait 90 days.
• corporation joined as a defendant

Parties can dismiss or settle only with court approval.

Corporation can move to dismiss based on independent investigation that concluded the suit is not in the corporation’s best interests.

Question 27

Direct action

Answer 27

suit for breach of fiduciary duty owed to shareholder by officer or director.

Question 28

Shareholder voting

Answer 28

Shareholders of record on the record date may vote at the meeting. Record date is fixed by the board but may not be more than 70 days before the meeting. Unless articles say otherwise, each outstanding share entitled to one vote.

Shareholders take action at a meeting or they can act by unanimous written consent signed by holders of all voting shares.

Annual meetings- elect directors

Special meetings can be called by holders of at least 10% of shares

Shareholders must be notified of meetings not fewer than 10 or more than 60 days before the meeting. Notice must be in writing to every shareholder entitled to vote stating date, time, and place of the meeting. For special meetings must state purpose.

Quorum is majority of outstanding shares entitled to vote. Quorum will not be lost if people leave the meeting. Each share entitled to one vote unless articles say otherwise.

Generally approval if votes cast in favor exceed votes cast against. For director elections need a plurality. Fundamental corporate change- majority. Other matters- majority of shares that actually vote.

If amendment to articles of incorporation will affect only a particular class of stock, those stockholders can vote, even if they typically do not have voting rights.

Question 29

Proxy voting

Answer 29

Shareholders can vote by proxy.

• writing
• signed by record-holder
• directed to secretary of corp
• authorizing another to vote the shares

Proxies are good for 11 months unless they say otherwise. Generally revocable by shareholder and may be revoked by the shareholder attending the meeting to vote themselves, in writing, or by subsequent appointment of another proxy.

Proxy can only be irrevocable if it states it is and it is coupled with interest or given as a security.

Question 30

Shareholder voting trust

Answer 30

Written trust agreement controlling how shares are voted. Copy must be given to the corp. Legal title to shares transferred to the voting trustee and original shareholders receive trust certificates and retain all rights except voting rights.

Question 31

Shareholder voting agreement

Answer 31

Written signed agreement to pool votes and instructing how to vote the shares. In states that will grant specific performance, no need to create a voting trust.

Question 32

Stock transfer restrictions

Answer 32

Restrictions are valid if they are not an undue restraint on alienation. i.e. right of first refusal to sell back to the corp is ok because it doesn’t restrict the ability to transfer.

Can enforce against purchaser if

(1) restriction noted on stock certificate or
(2) transferee third party had actual knowledge at time of purchase.

Question 33

Shareholders’ inspection rights

Answer 33

Shareholder has the right to inspect and copy the books and records of the corporation.

Any shareholder can demand access. Non-controversial things shareholders have unqualified right of access, for more controversial things right of access is qualified.

Noncontroversial- articles and bylaws, board resolutions regarding classifying shares, minutes of shareholders meetings from 3 years, communications sent by corp to shareholders over past three years, list of names and business addresses of the corp’s current directors and officers, copy of the corporations most recent annual report. Must make written demand 5 business days in advance.

Qualified right- excerpts of board minutes, corporation’s books, papers, accounting records, shareholder records. Must state proper purpose for the demand and provide five business days notice.

Question 34

Distributions

Answer 34

Decision to authorize distribution is solely within director’s discretion.

Corporation cannot make a distribution if it’s insolvent or if the distribution would render it insolvent.

Director not liable for distributions approved in good faith (1) based on financial statements prepared according to reasonable accounting practices or on a fair valuation or other method that is reasonable under the circumstances or (2) by relying on information from officers, employees, legal counsel, accountants, board committee

Question 35

Fundamental corporate changes

Answer 35

Amending articles
Merging or consolidating
Transferring substantially all assets
Converting to another form of business
Dissolving

(1) board action adopting resolution of fundamental corporate change
(2) board submits prosal to shareholders with written notice and
(3) shareholders must approve by majority of shares entitled to vote

Also need to deliver a document to secretary of state

Question 36

Right of appraisal after fundamental change

Answer 36

Dissenting shareholder can force the corporation to buy their stock at fair value

• merger consldiation
• transferring substantially all assets
• stock being acquired in share exchange
• converting to another form of business

No right if listed on national exchange or has more than 2,000 shareholders and has involved have value of at least $20M. Mostly exists in close corporations.

To perfect right

• shareholder files written notice of objection and intent to demand payment with corp
• shareholder must abstain or vote against at the vote
• if approved corp must notify all who filed notices within 10 days. notice includes time and place to submit shares and other terms of repurchase
• shareholder must make written demand to be bought out and deposit stock with corp
• corp must pay fair value of shares plus accrued interest
• shareholder must object to value within 30 days
• if shareholder and corp cannot agree on value corp can seek court intervention within 60 days

Question 37

Amendments to articles of incorporation

Answer 37

Traditionally you needed majority of shares held but now more states require a majority of those shareholders that actually voted.