Corporations Flashcards
What is a promoter?
A promoter is a person who undertakes to form a corporation and to procure for it the rights, instrumentalities, and capital to do business
- act on behalf of a corporation not fully formed
How can a corporation be held liable for contracts entered into before its incorporation?
Adoption - express or implied ratification
What is the liability of a promoter?
Promoter retains liability until novation - an agreement between all three parties that the corporation will replace the promoter
Are promoters fidiciaries?
Yes - they owe a duty of loyalty and care
How can a promoter avoid liability if they profit on a sale of property to the corporation?
liable for the profits unless:
- disclose all material facts
- transaction is adopted by all current shareholders
- promoter is the sole shareholder at the time of the sale and there are no plans to sell stock to other individuals
What portion of the sale proceeds can be recovered in a promoter to corporation sale?
- if a promoter acquires property before becoming a promoter and sells to the corp at a profit –> profit is only recoverable if it was sold for more than fair market value
- if promoter acquires property after –> any profit is recoverable
What is a subscriber?
A subscriber is a person or entity who make written offers to buy stock from a corporation not yet formed
How long is a subscription offer irrevocable for?
6 moths unless the agreement provides otherwise
What are the articles of incorporation requirements in VA?
A PAIN
Authorized shares - maximum number of shares the corporation is authorized to issue
Preferences - description of preferences and rights
Agent - registered agent and office - needs to be a VA resident or VA corporation
Incorporators - names and details of incorporators
Name of corporation - must include some indicia of corporation status “corporation” “limited”
Where do you file articles of incorporation?
State Corporation Commission
What is the penalty for doing unauthorized business as a corporation?
misdemeanor
What is the liability of the shareholders of a corporation?
Shareholders are not personally liable for the debts of the corporation
What are the three ways to pierce the corporate veil?
- alter ego
- undercapitalization
- misuse of corporate form
What are foreign corporations?
one incorporated outside of Virginia
What are the consequences of a foreign corporation conducting business in VA without a certificate?
- modest fine
- cannot initiate a suit in VA courts but can be sued in VA
What is par value?
minimum issuance price - the corporation must receive this price for its stock
what is no par value?
no minimum issuance price - any valid consideration deemed adequate by the board may be received for no par shares
What is treasury stock?
stock that was previously issued and has been reacquired - deemed no par stock
Who is liable for authorizing a below par issuance?
Directors and shareholders (liable for the full consideration of their stock)
What are preemptive rights?
the rights of an existing shareholder to maintain their percentage of ownership by buying stock whenever there is a new issuance of stock for CASH (not for services or property)
Do shareholders have default presumptive rights?
No - they don’t have them unless articles provide otherwise
How many board members must a VA board have?
One - need not be a VA resident or shareholder
How are directors appointed?
Shareholders elect directors for a max of 3 years
How are shareholder vacancies filled?
may be filled by the shareholders, board, or by a vote of a majority of remaining directors
How are directors removed?
Shareholders can remove a director before their term expires with or without cause at a meeting expressly called for that purpose with the majority of shares entitled to vote
Can directors vote by proxy or voting agreements?
No, only shareholders can
What is a quorum for directors?
a majority of all directors - required for directors to do business at a meeting
How many votes do directors need to pass a resolution?
if there is a quorum, the majority of the directors PRESENT
What is a business judgment rule?
presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders (not liable for good faith mistakes)
What is the duty of care?
director must act with the care that a prudent person would use with regard to their own business, unless the articles have limited director liability for breach of duty of care
What is the duty of loyalty?
directors cannot place themselves in positions where their individual interests clash with their duties to the corporation (self-dealing)
- cannot receive an unfair benefit to the detriment of the corporation or its shareholders unless there is a material disclosure and independent ratification
Two common breaches of loyalty?
- self-dealing
2. usurping corporate opportunities
How can a director avoid liability?
obtaining independent approval
not voidable if any one of the following is true:
- material facts are disclosed or known to the board and disinterested directors ratify the transaction
- material facts are disclosed to the shareholders and disinterested shareholders ratify
- the transaction was fair to the corporation
When can a corporation NEVER indemnify their director?
When the director is held liable to their own corporation
When MUST a corporation indemnify a director?
When a director is wholly successful in winning a suit against any party, unless articles provide otherwise
When MAY a corporation indemnify its director?
cases in which the director owes liability to third parties or if there’s a settlement with the corporation
Director must believe their conduct was in corporation’s best interest and:
- majority vote of a quorum of disinterested directors
- majority vote of a committee of at least two disinterested directors
- majority vote of shares of disinterested shareholders OR
- special counsel’s legal opinion
What is a derivative lawsuit?
one brought by shareholders to enforce a corporate cause of action where the corporation has not sued to protect its own rights
3 requirements for a derivative suit?
- shareholder must have owned stock at the act or omission and remain a shareholder throughout the proceedings
- fairly and adequately represent the corporation’s interest
- shareholder must have made a written demand on the corporation to take action. must wait 90 days unless rejected or irreparable harm will occur
How will a derivative action be dismissed?
majority vote of disinterested directors determines in good faith that maintenance of the action is not in the corporation’s best interests
What is recovery for a derivative lawsuit capped at?
$100,000 or past 12 months cash compensation, whichever is greater
What is the record owner and record date?
record owner is the person shown as the owner in the corporate records and record date is the voter eligibility cut off date (cannot be more than 70 days prior to a meeting)
What are proxies?
- writing or electronic transmission;
- authorized by a record shareholder;
- directed to the secretary of the corporation;
- authorizing another to vote the shareholder’s shares; AND
- valid for only 11 months unless provided otherwise by appointment
How do proxies become irrevocable?
appointment states AND is coupled with interest
Where do shareholders vote?
- annual meetings
2. special meetings - voting on a proposal or fundamental corporate change (need when/where/purpose)
When does notice of a shareholder meeting need to be sent to record holders?
not less than 10 days or more than 60 days prior to the meeting
What is a quorum for shareholders?
a majority of the shares entitled to vote, represented in person or by proxy unless otherwise provided in the articles
There must be a quorum at a meeting
How are shareholder proposals passed?
if there is a quorum, a proposal is approved if the votes cast in favor exceed the votes cast opposing it
What are voting trusts and voting agreements?
voting trust - trustee holds legal title
agreement - written agreement
What is a shareholder’s right to inspect?
upon 10 days’ written notice, any shareholder may inspect and copy corporate records
any shareholder who has been a holder for at least 6 months or owns 5% of outstanding stock may examine the accounting books and records of the corporation for ANY proper purpose on 10 days written demand
Who has the right to declare dividends?
directors
what is the priority of dividend distribution?
- common stock gets paid last and equally
- preferred shares have the right to be paid first
- preferred participating shares have the right to be paid TWICE (once as preferred and once with common)
- cumulative preferred shares have the right to be paid first for the past years in which there were no dividends in addition to the current dividend paymnet
When can a corporation NOT issue dividens
if its insolvent or if the dividends would render it insolvent
Who is liable for unlawful dividend payments?
directors are individually liable
Shareholder agreements eliminating formalities
shareholders may enter into agreements to run the corporation in any manner they desire - this isn’t a ground for piercing the veil
- needs to be approved by all shareholders and is valid for 10 years unless otherwise stated
What is an S corporation?
allows an entity to be taxed as a partnership
- no more than 100 owners of stock residing in US and only one class of stock
What is a business trust?
functions like a corporation
- owners can exercise control over the direction of the business trust without causing themselves personal liablity
What is a benefit corporation?
for-profit entity that intends to benefit the public and environment in addition to its shareholders
- needs to state it is a benefit corporation on its articles of incorporation
What are the six fundamental corporate changes?
- merger
- consolidation
- share exchange
- dissolution
- fundamental amendment of articles
- sale of substantially all assets ( not purchase)
Standard procedure for making fundamental changes
- board must adopt a resolution at a valid meeting
- notice must be given to shareholders (25 / 60 days before meeting)
- shareholders must approve by more than 2/3 of all shares entitled to vote
- appropriate articles are filed with S.C.C.
Shareholder votes for regular issues vs fundamental change
- regular issues can be approved by a majority of shares present at a meeting as long as there is a quorum
- fundamental - 2/3 of all outstanding shares
Dissenting shareholder’s right of appraisal
shareholders who are dissatisfied with terms of fundamental change are permitted to compel the corporation to buy their shares at fair value
When does a shareholder need to exercise their right of appraisal?
give notice to corporation’s secretary not less than 5 days before the date of the vote
