Corporations Flashcards
Promotor Liability
A promotor is personally liable for acting on behalf of a corporation if acting with knowledge that there was no corp.
A Corp will not be liable for pre-incorporation transaction unless: The corp. ratifies OR the corp. issues novation.
Corp. is not required to compensate promoter unless the acts are done at the corporation’s direction
Joint and several liability, only way to relieve promoter of liability is novation.
Incorporation: Filing
- Must file articles of inc. with the Department of state (may reserve the name for up to 120 days before incorporation)
Incorporation: Required Information
Basic information if the corp.
- Name of the corp. which includes Corporation, Company, or Incorporated or abbreviations of the same – the name must be distinguishable
- Address of principal office
- Name and address of registered agent with written acceptance
- Number of authorized shares (aggregate number of authorized shares)
- The names and addresses of each of the corporation’s incorporators
- Number of Directors (at least 1) (3 for non-profit)
- Does not have to state purpose (purpose required for non-profit)
Articles are incorrect or missing info
If the Articles of Incorporation are incorrect or missing information when filed the applicant may correct within 60 days and the articles will have the original effective date.
Amending Articles / Bylaws
Bylaws may be amended by the BOD or SH (shared power) unless articles give that power to SH’s – by majority vote
Amending AOI
No stock issued: BOD can amend by majority vote.
Stock issued: After BOD adopts amendment must submit to SH for approval by majority vote.
Annual Report
FL corps. must file an annual report with the Department of State may be dissolved if failure to do so. Cannot bring lawsuit until report is filed.
Annual Report must include:
- Name of Corp.
- Name and address of all registered agents, officers, and directors
- Tax ID number
- Date of Inc. and location of Principal Office
Stock: Default
Every share has equal voting power and equal right to receive assets of corp. upon dissolution
Stock: Issurance
Corp. does not have to issue all shares and BOD will determine what consideration is adequate for issuance of shares
BOD has the right to issue stock
Fractional shares are allowed
Stock in form of certificates is not required
Audit Commitee
A Corp. with stock on a national security exchange MUST have audit committee that has the direct responsibility to select, compensate and oversee the corporation’s outside auditors
Audit committee cannot select an outside auditor who is also employed by the corporation
Audit committee must be composed exclusively by independent directors (independent director = not employed or compensated by corporation)
Pre-incorp. Subscription
Pre-incorp. Subscription is irrevocable for 6 months FROM THE DATE OF SUBSCRIPTION/EXECUTION
After making a written demand on the subscriber to pay for the stock and waiting at least 20 days for payment, may sell the stock to someone else
Pre-emptive Rights
- Pre-emptive rights – Florida default: no preemptive rights but may AOI may provide preemptive rights
* When articles provide for preemptive rights there is a statutory restriction that prevents exercising preemptive rights within the first 6 months after incorporation – (AOI could waive this restriction)
Stock Distributions
- Distributions – BOD issues dividends – SH approval NOT required - The power to authorize a distribution is in the discretion of the board of directors
- Equity Test: to issue dividends the corp. must be able to pay off debt as it comes due in the ordinary course of business
- Balance Sheet Test: to issue dividends a corps total asset must exceed its total liabilities.
- Stock split IS NOT A DISTRIBUTION and is not subject to either test
Seurities Fraud 10b-5 (Insider Trading)
- To pursue an action the plaintiff must have purchased or sold stock (refraining is not enough to bring 10b-5 action)
- Four types of Insiders who may be liable for failure to disclose information:
Insider (director, officer, or employee of corp.)
Constructive insider (relationship to corp. that gives access to corp. info: lawyers, accountant, consultants, or independent contractors)
Tippees (person provided with information by an insider + expectation that info will be used to trade stock). Tippee must know (or should know) the insider info is a violation
Misappropriators (users of confidential info in violation of duty owed to corp.)
Shareholders Meeting
FL statutes require FL corps to hold annual meeting
Main purpose is to elect directors
SH’s may seek court order to compel meeting if hasn’t been held in 15 months
Special meeting: no notice within 60 days of demand then can seek court order to compel. Between 10-60 days’ notice required – may waive notice by showing up. Special meeting must state purpose.
Meetings may be held in any location but by default the location is corp. principal office
Shareholder Voting
- Corp cannot vote its own shares
- Default Quorum is 50% of shares eligible to vote
- Majority of shares eligible to vote (quorum) + Majority of shares present = passing a resolution
- AOI may increase quorum requirement but cannot decrease to less than 1/3 of share entitled to vote.
Proxy Voting
- Shareholders only
- Must be in writing
- Effective upon receipt by corp. or its agent
- Valid for 11 months unless otherwise stated
- SH may revoke UNLESS conspicuously says it is irrevocable coupled with an interest
- DIRECTORS CANNOT VOTE BY PROXY
Pool Voting
- Shareholders only
- Must be in writing
- No maximum time limits
- Do NOT need to be filed with corp.
- May be specifically enforced by the court
- DIRECTORS CANNOT ENTER INTO VOTING AGREEMENTS
Shareholder’s unlawful distribution
A shareholder who knowingly accepts an unlawful distribution can be compelled to return the distribution
Shareholder Management Agreements
- Shareholders may enter management agreements, altering the way in which a corporation is managed
- Can eliminate BOD
- Exercise or division of voting power
- Authorization of making distributions
- Voting trusts and voting pools need to be in writing
- CANNOT exculpate directors from all personal liability
Inspection Rights
Only need to own 1 share – can be less that 1 share .5 share = right to inspect
- SH’s may inspect corp. records for any reason (must be in good faith** and describe a **proper purpose) related to SH interest including:
- Most recent annual report filed with the state
- All written communications between SH’s in last 3 years
- Names and addresses of all directors and officers
- Minutes of all SH meetings
- Records of all actions taken without a SH meeting
- Corp. may charge SH reasonable fees
- Looking for fraud is a proper purpose
- SH must give 5 days’ WRITTEN notice (10 days for non-profit)
Shareholder’s Direct lawsuit
must show direct harm + special injury
Shareholder’s Derivative Lawsuit
- Company suffers harm SH brings action on behalf of corp.
- SH must make demand on the corp. and wait 90 days UNLESS:
- Demand would be futile
- Delay would lead to irreparable harm
- Complaint: when filing the complaint for the derivative action it must include whether a demand has been made or why such a demand would be futile
- SH must own shares at time of wrong + the start of lawsuit + continue to be a SH throughout the litigation
- When BOD forms committee to determine if derivative action is in the best interest of the corp. there must be AT LEAST 2 MEMBERS
- SH seeking removal of a director does not need to be SH at the time of the wrong
- AOI Restrictions of Derivative Actions:
- Forum selection provisions
- CANNOT: require arbitration or impose liability for attorneys fees
Dismissal of Derivative Suit
May be dismissed by one of the following groups if determined in good faith and after reasonable investigation that proceeding is not in the best interest of the corp.
- Majority vote of independent directors
- Majority vote of committee consisting of two or more independent directors
- A panel of one or more independent directors appointed by the court
Piercing the Corporate Veil
- SH personally liable IF: a plaintiff proves* that the incorporation was *merely a formality* and that *the corporation neglected corporate formalities and protocols
- Factors in determining whether or not to pierce corporate veil – Fraud or corp. was used to mislead
Directors and Officers
Natural person at least 18
Board of directors may fix the compensation of the directors unless the articles of incorporation or the bylaws state otherwise
Sale or transfer of assets in the ordinary course of business does not require BOD or SH approval
Director’s Term
Each director has term that expires at the next annual meeting unless staggered
Default: Directors can be removed without cause — AOI may require cause
A director may be removed at a meeting of the shareholders, provided that the notice of the meeting states that removal of the director is the purpose, or one of the purposes, of the meeting.
a director elected by a voting class of stock can only be removed by that same class
A DIRECTOR CANNOT REMOVE A DIRECTOR – only by Shareholders or judicial proceedings
Directors Meeting
Quorum: majority of directors authorized in AOI/bylaws (i.e., AOI provides for 10 directors — 4 have died and 6 remain — still need 6 for quorum)
May increase but cannot reduce to less than 1/3 directors required in AOI (i.e., 10 directors cannot require less than 3 directors)
Votes required to pass: MAJORITY PRESENT (i.e., 20 total members on Board: Need 11 for quorum and if 11 constitutes quorum need 6 yes votes to pass)
Director must be present during a vote in order to be counted for quorum purposes
President of Corp. has the power to call a special meeting of BOD
Director’s Meeting: Corporate Action
Board of directors must hold a meeting in order to authorize a corporate action.
The BOD may act without a meeting through the written consent of the directors, this option is only available if all directors consent to the action.
Director’s Inspection
A director is entitled to inspect and copy corporate books, records, and other documents for any proper purpose related to the performance of her duty as a director
When the corporation refuses to grant the director access to these items, the director can seek a court order to enforce this right.
Director’s Meeting Notice
Regular meeting: no notice
Special meeting: 2 days with date, time, and place
No purpose for special meeting
Director’s Liability
Director may be liable for action taken at a board meeting even without voting.
Director’s Duties
Duty of Care/Business Judgement Rule: Director is only liable for breach of duty of care for abuse of discretion, bad faith, fraud, illegality.
Self-Dealing
- May be allowed if the terms are fair to the corp.
- Burden is on Directors to show the conflict is fair Unless:
- Majority of disinterested directors approve; OR
- Majority of disinterested SH’s approve
Committee
The BOD may authorize a committee of one to perform a management function. 1 person committee = ok (unless derivative investigation)
Director Indemnification
No indemnification of a director if he is found guilty of a crime, unless director has reasonable cause to believe the conduct was lawful or had no reasonable cause to believe the conduct was unlawful.
Indemnification is required if a director is successful in defending against the suit.
Indemnification is permitted if the actions are in good faith and the director acted in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation
Merger: Long-form Merger
Two or more corps merging together
Directors of both companies must approve
SH’s of both companies must approve
Default: simple majority of all outstanding shares entitled to vote
SH approval of merger not required if
- Corp. survives merger
- AOI will remain the same
- SH’s will hold the same number of shares and have the same rights after the merger
Merger docs must be filed with the State
Short-Form Merger
Merger between parent and subsidiary
When Parent company owns at least 80% of the voting power of each class of outstanding stock = SH approval is NOT required.
Asset Acquistion
Directors must propose the sale and SH must approve the sale
A corporation that acquires the assets of another corporation is not liable for torts of the predecessor corporation – unless specifically assumed
Appraisal Rights
SH entitled to vote on merger may seek appraisal rights (being bought out)
Not entitled to “independent evaluation” corp. will offer “fair/full value” if SH does not agree they can counter or court can determine value
Must vote no or abstain to trigger appraisal rights
NO appraisal rights when SH’s can sell shares in a public market
NOTICE: shareholder must notify the corporation in writing of his intent to exercise appraisal rights and deliver the notice before the shareholder vote on the merger is taken
Notice to the shareholder to accept appraisal rights is at least 40 days but no more than 60 days
Dissolution
Voluntary – Directors propose and SH’s approve
Involuntary
- Florida Department of Legal Affairs: fraud or abuse of authority
- By creditor if they have an unsatisfied judgment and the corp. is insolvent – CREDITOR + INSOLVENCY
- SH: directors are deadlocked or SH’s deadlocked
- Assets being wasted or directors in control acting illegally
- Directors are acting illegally, oppressively, or fraudulently
- Can sue or defend suits during wind up
Limited Liability Corporations (LLC)
Articles of Organization – same rules except name must contain LLC
Members – LLC must have at least 1 member
Adding members requires UNANIMOUS consent
LLC: Profts and Losses
If operating agreement does not allocate how profits and losses will be distributed, they will be distributed according to each member contribution.
LLC: Voting
Majority-in-interest
Member Managed: voting is proportionate to each member percentage of ownership (i.e., if one person owns 60%, they can approve anything)
Manager Managed: majority of managers
LLC: Member Managed
Member Managed = Default
Each member is an agent
Fiduciary duties of loyalty and care
LLC: Manager Managed
The manager is an agent of the LLC for the purposes of its activities and affairs
An act of the manager binds the LLC
Articles of Org. may provide for manager managed LLC
Managers are agents
The transfer of a membership interest to another person does not automatically give that person the right to participate in the management of the LLC.
LLC Duties
Duty of Care – ordinary negligence = ok
Must Refrain from: gross negligence, recklessness, willful or intentional conduct, knowing violation of law
Fiduciary duties of loyalty and care
DUTY OF LOYALTY CAN BE WAIVED IN OPERATING AGREEMENT
Duty of Loyalty
Hold LLC property in trust
No dealing as adverse party
No compete with LLC
General duty of good faith and fair dealing
Operating agreement can alter most duties as long as it is not Manifestly Unreasonable
LLC: Charging Order
A judgment creditor of a member of a multi-member LLC has as his only remedy a charging order to receive distributions of the member’s interest
Cannot force a sale of an interest in an LLC
When the distributions are insufficient the person can force a foreclosure sale of the interest, if single-member LLC.
→
§ Single-member – creditor can foreclose
LLC: Disassociation
Disassociation
May disassociate at any time (but likely will be sued for damages)
Does not automatically trigger buy out right
Professional Association
Name: “Chartered” “Professional Association” “P.A.” “PA” or if limited liability “PLLC” “P.L.L.C”
ALL SH’s or members must be a member of the same profession
Protects from malpractice by another member by not own malpractice
Not-for-profit Corporation
Cannot have “Company” in name but may have corporation, incorporated, cooperative, or co-op.
Consists of members instead of SH’s
Right to inspect and copy records
Right to elect directors
A not-for-profit corporation may pay its members, directors, or officers’ reasonable compensation for services rendered
No voting rights by members unless provided for in AOI or bylaws
No financial distributions to members
A charitable trust cannot be converted to a corporation
S-Coporation
Pass through taxation if:
Less than 100 SH’s
Individuals, estates, and certain trusts (no corps or partnerships)
Can only have 1 class of stock
Requires unanimous SH consent to convert to S-Corporation
