Corporations Flashcards
Owners of a corp
Shareholders
Group in charge of mgmt?
Board of directors
Agents of corp to carry out policy?
Officers
Limited liability for owners, directors, officers
Generally, only corp itself is liable for corp obligations! Owners risk their investment in purchasing shares
What is the RMBCA?
Revised Model Business Corporation Act
Ownership interests are freely transferable unless provided otherwise
C corp
Taxed as entity distinct from shareholders; double taxation :( taxed at corp level then taxed as income
S corp
Taxed like p/ship; Restricted model! 1) stock held by no more than 100 ppl 2) SH must generally be individuals 3) only 1 class of stock
De jure corporation
Corp formed in accordance with law
De facto corp
Corp laws have not been followed but may be recognized through estoppel
De jure corp creation
Person, paper, act!
De jure person
Person: one or more persons known and incorporators - execute/deliver Arts of Incorp. to sec of state. May be person or entity. Do not have to be state citz
De jure paper
Articles of incorporation:
- name of corp
- name/addy of incorporator
- registered agent and addy of registered office
- stock info (stock class, voting rights, limitations of stock, etc)
- biz purpose (presumed lawful)
Ultra vires act
Outside of biz purpose; under the MBCA, generally enforceable. UV nature of act can only be raised in 3 scenarios:
- Shareholder may sue to enjoin proposed UV act
- Corp may sue officer/director for damages for approving UV act;
- State may bring action to dissolve corp for committing UV act
De jure act
Incorporators have notarized articles delivered to sec of state/pay fees
Filing is conclusive proof of corp existence
Organizational mtg
If initial directors names, board holds org mtg.
If not named, incorporators hold mtg.
Purpose: complete org of corp - adopt bylaws and appoint officers
Bylaws
Internal doc- org’s operating manual
If conflict b/w articles and bylaws, articles control.
Amendment/repeal? Board or SH
Internal affairs doctrine
IA governed by law of state of incorporation
Entity status
Corp has entity status upon formation - legal person!
Benefit Corp/ B corp
Formed for profit and also to pursue some benefit to broader social policy cause
- must be noted in articles
- files annual benefit report assessing how it’s pursued social mission
- decision makers must consider SH and broader community
Limited liability
Generally SH liable only to pay for their stock, not corp debts.
One exception!
Defectively incorporation
If incorporators thought they formed corp but didn’t, they’d be personally liable for biz debts (p/ship is formed instead).
Two doctrines may save them - 1) de facto corp and 2) corporation by estoppel
ANYONE ASSERTING EITHER DOCTRINE ^ MUST BE UNAWARE OF FAILURE TO FORM A DE JURE CORP.
De facto corp characteristics and requirements
1) Must be a relevant incorporation statute (auto met)
2) parties made a good faith attempt to comply with the statute, and
3) there has been some exercise of corporate privileges (parties thought there was a corp)
IF 3/3 satisfied, biz treated as a corporation for all actions except vs state.
Limitation: only defense to person who was unaware no valid incorporation. People who know there was no properly formed corp = jointly and severally liable if they are active members of the corp.
NB: abolished in most states.
Corp by estoppel
Persons who have dealt with the entity as if it were a corp will be estopped from denying the corp’s existence.
Prevents K recession/corp from avoiding liability.
*Applies only in K cases; NOT to tort cases.
NB: abolished in most states.
Pre-Incorp Ks (knew there was no corp!)
Promoter = person acting on behalf of corp not yet formed. Can procure commitments for capital/other instrumentalities for corp after formation.
Absent other agreement, promotors are joint venturers (partners) who have fid r/ship with each other. Breach if secretly pursue personal gain at expense of fellow promoters. Also owe fid duty to corp - disclosure and good faith.
Promoter breach of fid duty arising from sales to Corp
Promoter who profits by selling property to the corp may be liable for profit unless all material facts of the transaction were disclosed. Disclosure must be to ALL WHO ARE CONTEMPLATED to be part of the initial financing scheme.
Fraud: Promoters will always be liable for fraud if P can show that they were damaged by promoter’s fraudulent misrepresentation/fraudulent failure to disclose all material facts.
Promoter’s r/ship with TPs - who bears liability?
Corps liability = not bound to Ks entered into by promoter in the corporate name prior to incorporation. May become liable only if it expressly/impliedly adopts the K.
- Express: board takes action adopting K.
- Implied: corp accepts K benefit.
Promoter’s liability = under MBCA, anyone who acts on behalf of a corp knowing it is not in existence is J&S liable for obligations incurred.
- If promoter enters agreement with TP on behalf of planned/unformed corp, promoter = personally liable on L and continues to be liable after corp formed even if corp adopts/benefits! Released only upon novation (agreement by all three parties to release promoter from liability and substitute corp for promoter in K).
Note: if initial agreement b/w Promoter and TP expressly relieves promoter of liability, treated as a revocable offer to corp. Promoter has NO liability.
Promoter’s right to reimbursement
Promoter held personally liable on reincorporation K may have a right to reimbursement from corp for any benefits received by corp.
Foreign corps!
If FC transacting biz in a state, must register and pay fees.
Foreign means anything out of state.
Transacting biz means regular course of intrastate biz activity.
Registering: sec of state in state where you want to do biz. Must provide info re. AOI and prove good standing in home state.
Issuance of stock
To raise money, corp can either borrow or raise it by selling stock (or both). Corp will issue a security to the investor.
Debt securities
When corp BORROWS money, it issues a debt security (bond).
Bond is a promise that corp will repay loan with interest.
Unsecured debt = debenture.
Holder of debt securities is a creditor, not an owner of the corp.
Debt terminology
Debt obligations may be payable to either:
Holder of the bond (bearer or coupon bond) OR
Owner registered on corp’s record (registered bond)
Equity securities
When investor BUYS an ownership interest in the corp, it issues equity securities (stock).
SH is an owner, not a creditor of the corp.
Equity terminology
Shares described in AOI are authorized shares.
Shares that have been sold are issued and outstanding.
Shares that have been reacquired by the corp are authorized but unissued.
Classification of shares
Corp may choose to issue only one type of share, giving owners equal ownership rights –> COMMON SHARES
or
Ownership rights can vary if AOI provide that the corp’s stock is to be divided into classes/series within a class (must be in AOI).
Share options
Corp may issue share options - right to purchase shares in the future under predetermined terms (board decides). Options may be offered in exchange for any type of consideration.
Issuance
Issuance of stock is when a corp sells it own stock.
Subscriptions
Written offers to buy stock from a corporation.
Issue: are these offers revocable?
Preincorporation subscription
Under MBCA, preincorporation subscriptions are irrevocable for 6 MONTHS unless otherwise agreed/all subscribers consent.
Payment: unless otherwise provided, payment is due upon demand of the board. Failure to pay may be penalized.
Postincorporation subscription
Revocable until accepted by corp.
Consideration for stock issuance
Very broad!!
Stock may be issued for any tangible or intangible property or benefit to the corp - think money or services already performed for corp.
Amount of consideration (traditional)
Traditional view - par
Par means the minimum issuance price.
Example: C Corp is issuing 10,000 shares of $3 par stock. What is the min amount it must receive? $30K.
No par means no minimum issuance price, means the board can have the stock issued for any price it sets.
Watered stock!!
If you’re given par stock, watch for watered stock which can occur when par value stock is issued for less than its par value.
Example:
C corp issues 10,000 shares of $3 par to X for $22K. Corp wants to recover the $8K of water. Who is liable?
Directors? yes if they knowingly authorized the issuance.
X (purchaser of stock)? Yes. no defense.
What if X transfers to a TP? TP not liable if IGF.
Amount of consideration (MBCA approach)
Board determines value which will be considered conclusive if made IGF.
Preemptive rights
Right of an existing SH 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.
Ex.
S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp is planning to issue an additional 3,000 shares. If S has preemptive rights, then how many shares does S have the right to buy? S is a 20% owner. 20% of 3,000 = 600.
Preemptive Right must be stated in articles
Under MBCA, SH do not have a preemptive right to purchase newly issued shares to maintain their proportional ownership interest unless the AOI provides the right.
If AOI silent, no right.
Limitations on Preemptive Right
even if AOI silent, SH generally have no preemptive right in shares issued:
1) for consideration other than cash
2) within 6 months after incorporation OR
3) without voting rights but having a distribution preference.
Directors: statutory requirements
Directors must be adult natural persons (humans w/ legal capacity). Need NOT be SH unless otherwise agreed. Any qualifications in AOI must be reasonable/lawful.
Number: must have one or more directors. # can be set in AOI or bylaws.
Election: may be named in AOI. If not, elected at org mtg. After that, SHs elect directors at the annual SH meeting.
Staggered board
Entire board is elected each year unless there is a staggered board (set in AOI). Staggered board is divided into half or third and that fraction is elected each year (think like the senate/HOR election cycle).
Director removal
SH can remove directors before their terms expire with or without cause.
In some states!!! –> If staggered board, can remove only with cause.
D elected with cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election.
AND
D elected by a voting group of shares can only be removed by that class.
Vacancies on BOD
Board or SH appoints someone to serve in a vacancy (D resigns before term up). But if SH created the vacancy through removal, SH generally must select replacement.
Board Action
Board must act as a group.
Individual directors have no authority to speak for or bind the corporation.
Must act in the following ways:
1) unanimous agreement in writing OR
2) at meeting, which must satisfy quorum and voting requirements
Ratification of defective corporate actions
Ds, incorporators and Os may ratify defective corporate action.
BOD must state the action to be ratified and the nature of the failure of authorization, approve the ratification, and seek SH approval if necessary.
Board Meetings - Notice!
For reg meetings - notice not required.
For special meetings - at least 2 days written notice (date/time, place); notice need not state purpose.
Failure to give notice: whatever happened at the mtg is voidable/void unless Ds who were not notified waive notice (1) in writing any time or (2) by attending the meeting without objection at the start.
BOD Meetings - Proxies?
Ds CANNOT give proxies or enter voting agreement for how they will vote as Ds because Ds owe nondelegable fiduciary duties.
BOD Meetings: Quorum
For ANY meeting, need quorum –> a MAJORITY of all directors, unless bylaws say otherwise (but quorum cannot be fewer than 1/3 of board members).
If no quorum, BOD cannot act.
BOD Meetings: approval of action
If quorum present, only need a majority of those present to act.
BOD Meetings: Broken Quorum
Quorum can be lost/broken if people leave. Once broken, board cannot act at that mtg.
BOD Meetings: actions by unanimous written consent
Any action required to be taken by Ds at a formal meeting may be taken by unanimous written consent without a meeting.
EXAM! D does not have the power to bind the corp in K UNLESS there is actual authority to act. Actual authority generally can arise only if: (1) proper notice was given for D’s meeting, a quorum was present, and a majority of the Ds approved the action, OR (2) there was unanimous written consent of Ds.
Role of the BOD
Manages the corp.
Board may create certain other committees, but BOD remains responsible for supervision.
Committees cannot take certain actions:
- Declare a distribution
- Fill a board vacancy
- Recommend a fundamental change to SH
Committee CAN recommend such actions to the full board.
D&O: Fiduciary Duties, Liability, and Indemnification
Standard for Fid Duties owed to Corp: D must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in like position would reasonably believe appropriate under the circumstances.
Duty of care: Burden on Challenger/P
Common scenarios: (1) nonfeasance; (2) misfeasance
Duty of Care violation: Nonfeasance
D basically does nothing (lazy director).
D will be liable ONLY IF his breach caused a loss to the corp. Hard to show causation for nonfeasance.
Duty of care violation: misfeasance
When the board makes a decision that hurts the business. Causation is clear.
BUT NOTE: D is not liable if she meets the business judgment rule.
Business Judgment Rule
Directors who meet the standard will not be liable for corporate decisions that in hindsight turn out to be poor/erroneous.
We expect a person to do their homework. If she did, she is not liable for bad results.
BJR = a presumption that when the board acted, it did appropriate homework. A court will not second guess a business decision if it was made in good faith, was informed, and had a rational basis. A director is not a guarantor of success.
Director may rely on reports/information
D is entitled to rely on info, opinions, reports or statements if prepared by:
- corp officers/employees whom D reasonably believes to be competent/reliable;
- legal counsel, accountants, others re. matters w/in professional competence;
- committee of a board of which the D is not a member if reasonably believes committee merits confidence.
Duty of loyalty
Burden on D. Common scenarios: 1. self dealing 2. competing ventures 3. corporate opportunity doctrine
Duty of loyalty: self dealing issues
Self dealing transaction - any transaction b/w corporation and one of its Ds, that D’s close relative, or another business of Ds. (we worry D has divided loyalties).
Conflicting transaction will not be set aside if:
- approved by majority of disinterested directors after full disclosure of material facts
- approved by majority of votes entitled to be cast by disinterested SHs after full disclosure of material facts. NOTICE MUST DESCRIBE TRANSACTION.
- judged by circumstances at the time of the transaction that it was fair to the corp.
Interested D’s presence at the voting meeting is irrelevant.
For purposes of the vote at a director’s meeting, quorum is a majority of disinterested Ds.
Some courts also require a showing of fairness: adequacy of consideration, corporate need to enter the transaction, financial position of the corporation, and available alternatives.
Remedies: enjoining the transaction, setting transaction aside, damages and similar remedies.
Duty of loyalty: competing ventures
Ds may engage in unrelated businesses, but engaging in a directly competing business raises duty of loyalty problems.
Director cannot compete directly with her corporation. If breach, corp can get a constructive trust on profits from the competing venture.
Duty of loyalty: corporate opp. doctrine
D’s fid. duties prohibit them from diverting a business opp from their corporation to themselves without first giving their corporation an opportunity to act –> usurpation of a corporate opportunity.
A director cannot usurp a corporate opportunity. That means the director cannot take advantage of the opp until he has presented it to the board, disclosing all material facts, and waits for the board to reject the opportunity.
So what is a corporate opp?
- something in corp’s business line
- something the company has an interest or expectancy in
- something the D found on company time or with company resources
* A usurpation problem arises on if a D takes advantage of a business opportunity in which the corporation would have an interest or expectancy. The closer the corp’s line of business is to the opportunity, the more likely a court will find it to be a corporate opp.
- -Lack of corp’s financial ability to take advantage is not a defense.
- -Board generally decides to accept/reject opp
Duty to disclose
Ds also have a duty to disclose material corporate information to other members of the board.
Loans
A corporation can make a loan to a D if it is reasonably expected to benefit the corporation.
Which Ds may be liable?
Ds may be liable to the Corp for improper distributions, improper loans, ultra vires acts and breaches of fid duty.
D is presumed to concur with board action unless her dissent or abstention is noted in writing in (1) the minutes; (2) delivered in writing to the presiding officer at the meeting; or (3) written dissent immediately after the mtg.
Exception: D is not liable under the above rule if she was absent from the mtg.
Officers. Powers & Status
Officers are agents of the corporation. Whether the officer can bind the corporation is determined by whether she has agency authority to do so.
[unauthorized actions may become binding via ratification, estoppel or adoption.]
Corp is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized.
Officers: Duties
Officers are determined by the bylaws. They owe the same duties of care/loyalty to the corporation as Ds.
Officers: Selection and Removal of Officers
Officers are selected and removed by the board, which sets officer compensation.
Officers may resign any time with notice; corporation may remove an officer any time with or without cause.
SHs do not hire and fire officers.
Officers: indemnification of directors/officers/employees
Category 1: no indemnification - a corporation cannot indemnify a D who is held liable to the corporation; or held to have received an improper benefit.
Category 2: mandatory indemnification - unless limited by AOI, corporation MUST indemnify a D or O who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses.
Category 3: permissive indemnification - corporation MAY indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against D if D acted in good faith and believed her conduct was in the best interests of the corporation
Court ordered indemnification –> a court in which a D or O was sued may order indemnification if it was justified in view of all circumstances.
Limitations of liability –> provisions can eliminate liability only for duty of care.
Advances –> corp can advance expenses to a D defending as long as D furnishes corp w/ a statement that D believes he met the appropriate standard of conduct and will repay if found in breach.
Shareholders: mgmt and liability
Generally, SH have no direct control in mgmt of the corporation’s business.
Close corps: SH can run the corp directly in a close corp. Characteristics of a close corp are that there are few SHs and the stock is not publicly traded.
SH mgmt agreements = SH mgmt agreements set up alternative mgmt for a close corporation. MBCA allows SH to enter into agreements to dispense with the board and vest mgmt power in the SHs.
There are two ways to set up a SH mgmt agreement:
- in the articles and approved by all SH OR
- by unanimous written SH agreement
Agreement should be conspicuously noted on the front and back of the stock certificates. Who owes the duties of care and loyalty to the corp? Whoever manages the corp.
Shareholders: special fiduciary duty in close corporations
Courts impose a fid duty on SH owed to other SH, because a close corporation looks like a partnership – partners owe each other a fiduciary duty of utmost good faith; these courts apply the same duty in the close corp.
Controlling SH cannot use their power to benefit at the expense of minority SH. There is also a duty to disclose material information to the minority SH.
SH: oppression of minority SH
If there is oppression of minority SH, they can sue the controlling SH who oppress them for breach of fid duty. Because oppression thwarts their legitimate goals for investing and they have no way out.
SH: oppression of minority SH
If there is oppression of minority SH, they can sue the controlling SH who oppress them for breach of fid duty. Because oppression thwarts their legitimate goals for investing and they have no way out.
Professional corporations
Licensed professionals can incorporate as professional corporations/associations. The articles must state that the purpose is to practice in a particular profession.
Liability: profs are generally liable for malpractice, but SH are generally not liable for corporate obligations or for other professionals’ malpractice.
Can SH be liable for corp debts?
Generally, no. Because corp is liable for what it does; BUT SH might be personally liable for what the corp did if the court pierces the corp veil.
PIERCING THE VEIL HAPPENS IN CLOSE CORPS ONLY.
Piercing the veil
To pierce the corp veil and hold SHs personally liable,
- SH have abused the priv of incorporating; and
- Fairness requires holding them liable.
Elements justifying piercing:
- alter ego - situations arise where SH treat corp assets as their own, commingle their money, etc.
- undercapitalization - where at the time of formation, corp undercapitalized. Courts may be more willing to pierce for tort victim > K claimant.
- fraud, avoidance of existing obligations, or evasion of statutory provisions - corp veil may be pierced where necessary to prevent fraud or to prevent an individual SH from using the entity to avoid his existing personal obligations.
PCV - who is liable?
Normally, only SH who are active in biz operation will be personally liable. Court might pierce the corp veil and hold the parent corporation liable just as it could if the SH were a human.
Types of liability: where corp = involved, claims of SH-creditors may be subordinated to outside creditors’ claims.
Who may pierce? Generally, creditors.
SH Derivative Suits
Shareholder is suing to enforce corp’s claim. ASK: could the corp have brought this suit?
Recovery? Corp gets $.
Requirements:
- SH must have been a SH at the time the claim arose or must have become a SH through transfer by op of law from someone who did own stock at the time the claim arose.
- adequate representation - SH must also fairly and adequately represent the corp’s interest.
- SH must make a written demand on the corp to take suitable action and has to wait 90 days.
- Corp must be joined to the suit.
Dismissal requires court approval. Dismissal must be based on an independent investigation that concluded that the suit is not in the corporation’s best interest. Investigation must be made by independent directors or a court appointed panel of one or more independent persons.
SH Direct Action
SH may bring direct action for a breach of fid duty owed to SH by an O or D.
Recovery? SH gets $.
SH: voting
Who votes?
Outstanding stock & record SH:
Authorized stock = # of shares the corp may issue.
Issued stock = # of shares the corp has sold.
Outstanding stock = shares corp has issued but not reacquired.
Record SH/Record Date
SH of record on record date may vote at the meeting. The record date is fixed by the BOD but may not be more than 70 days before the mtg.
Unless AOI say otherwise, each outstanding share is entitled to one vote
SH: voting
exceptions
Exceptions to general rule that record owner on the record date is who votes:
- Treasury stock: No one votes the stock, because it was outstanding on the record date.
- BUT if SH dies after the record date, S’s executor votes the shares.
- Voting by proxy: a SH may vote her shares in person or by proxy executing in writing. A proxy is (1) a writing; (2) signed by the record SH; (3) directed to the secretary of the corporation, (4) authorizing another to vote the shares.
- Proxies are good for 11 months.
- Revocation of proxy: a proxy is generally revocable by the SH and may be revoked by the SH attending the meeting to vote themselves, in writing to sec of corp, or by subsequent appointment of another proxy.
- Irrevocable proxies: will be irrevocable only if it states that it is irrevocable and is coupled with an interest or given as security - (1) requires the proxy says it’s irrevocable and (2) proxy holder has some interest in the shares other than voting.
SH: voting
SH voting trusts and voting agreements
X, Y and Z Sh can pool their voting power via a voting trust or voting agreement.
-Requirements for Voting Trust:
A voting trust is a written agreement of SH under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement. Requirements:
1. a written trust agreement, controlling how the shares will be voted;
2. a copy of the agreement is given to the corp;
3. legal title to the shares is transferred to the voting trustee; and
4. the original Sh receive trust certificates and retain all SH rights except for voting.
-Requirements for Voting Agreement:
SH can enter into a voting agreement. Requirements:
1. be in writing and signed.
