Corporations Flashcards
What are the six defining attributes of a corporation?
(1) Separate entity
(2) Perpetual life
(3) Powers granted by State Statute
(4) Centralized Management and Control
(5) Transferability of Interest
(6) Limited Liability for Shareholders
When is the corporate veil likely to be pierced?
Elements:
(1) 3rd Party “injured” by Corporation
(2) Corporate formalities were not followed or corporation was not adequately capitalized at time of formation, AND
(3) Injustice would otherwise result
What is the most common example of corporate formalities not being followed?
Commingling of corporate funds, or using corporate assets for personal use
Who are the primary players during the pre-incorporation period?
Promoters:
any person who directly or indirectly takes the initiative of setting up the corporation.
What are the fiduciary duties of the Promoters during the pre-incorporation period, and who are they owed to?
Duties:
- Full disclosure of material facts
- Promote Corporation’s interests
- Good Faith
Owed to:
- fellow promoters
- investors
- the corporation being formed
What liabilities does a Promoter have to 3rd parties?
“Any person who acts on behalf of a corporation, knowing that it does not yet exist, is PERSONALLY LIABLE for debts incurred.”
More than one promoter? Joint and several liability.
What are the filing requirements for forming a corporation (what needs to be included)?
Must File, and PAY FEE
Articles of Incorporation, including:
(1) Incorporators’ names/addresses
(2) Corporation’s name w/ designation (“Inc.”)
(3) Classes and number of shares authorized
(4) Registered agent and office
(5) Number of directors (unless in bylaws)
What if a corporation files the Articles of Incorporation, but forgets to pay the filing fee?
It has NOT been incorporated.
At what point in time does a corporation come into existence?
When it has been properly filed.
Who is liable, and for what, if a corporation is improperly filed?
(1) Active participates are jointly and severally liable for debts/torts of business
(2) Passive investors probably NOT personally liable
What if there was a filing error in forming the corporation, but the Secretary of State didn’t notice?
Then the corporation is still formed.
After filing (incorporating), what is the first thing that a corporation must do?
ORGANIZATIONAL MEETING:
(1) Adopt bylaws
(2) Issue at least ONE share of stock, before doing anything else
(3) Other business is then acceptable
What is the process for issuing stock?
(1) Board must authorize issuance of shares
(2) Share must be issued for adequate consideration
- (a) determined by Board in good faith, but
- (b) Shares of same class, sold at same time, same price.
Minority rule: no issuing shares for FUTURE payment/services
What are the Principal Office Records (list) and what is important about these?
Records:
(1) Articles and Bylaws
(2) Board Resolutions and Share classification
(3) Shareholder minutes and actions (3 years)
(4) General written communications to shareholders (3 years)
(5) Financial statements (3 years)
(6) Names/addresses of officers and directors
(7) Most recent annual report
Importance:
Shareholders may inspect these AS A MATTER OF RIGHT
Besides the Principal Office Records, what other records is a corporation required to maintain? Can shareholders inspect these?
(1) Director meetings and actions
(2) Accounting records (beyond financial statements)
(3) Shareholder names and addresses
Shareholders can inspect these upon a showing of PROPER PURPOSE.
What counts as a “proper purpose,” relating to shareholders’ inspection rights?
Proper purpose =
relates to the shareholder’s interest as a shareholder
What notice is required for Annual Shareholder Meetings?
Notice must be:
(1) in writing
(2) 10-60 days before meeting
(3) including time, place, date
Who can call a Special Meeting for the corporation?
(1) Board
(2) Shareholders of at least 10% of voting stock
(3) Court
What must be included in notice for a Special Meeting?
(1) PURPOSE of meeting
(2) Time, place, date
What is the effect of errors in the proper notice procedures for a meeting?
(1) The results of the meeting are VOIDABLE by those who did not get proper notice.
(2) Also, notice can be waived in writing, or by showing up to the meeting
What duties do shareholders owe to the corporation?
(1) Generally - no duties, EXCEPT:
(2) Controlling Shareholders (own majority of stock):
- (a) Same duty as Directors/Officers
- (b) Look especially for LOYALTY violations
- (c) If controlling shareholder acts to own benefit in a way that damages the minority, this is OPPRESSION OF THE MINORITY
What do shareholders get to vote on?
(1) Electing the Board
(2) Removing a Board Director
(3) Fundamental Changes
Besides proper notice, what is needed for a proper shareholder meeting?
“Quorum”:
- Majority of shares entitled to vote, at START of meeting
- Articles may provide some fraction other than majority
- A proxy = present, for quorum purposes
What are “preemptive rights?”
Right of shareholder to acquire additional shares of corporation as they are issued, so as to maintain same % of shares
What are “dissenters’ rights?”
The right to vote no on a fundamental corporate change, and to receive the fair value of one’s shares if the dissenter loses.
What shareholder litigation actions are available?
(1) Direct actions, for benefit of the shareholder
(2) Derivative actions:
- (a) Shareholder can sue in name of corporation,
- (b) FOLLOWING proper demand on the Board (or showing of futility)
- (c) recovery is for the benefit of the corporation