Corporations

Question 1

Owners of a corp

Answer 1

Shareholders

Question 2

Group in charge of mgmt?

Answer 2

Board of directors

Question 3

Agents of corp to carry out policy?

Answer 3

Officers

Question 4

Limited liability for owners, directors, officers

Answer 4

Generally, only corp itself is liable for corp obligations! Owners risk their investment in purchasing shares

Question 5

What is the RMBCA?

Answer 5

Revised Model Business Corporation Act

Question 6

Ownership interests are freely transferable unless provided otherwise

Question 7

C corp

Answer 7

Taxed as entity distinct from shareholders; double taxation :( taxed at corp level then taxed as income

Question 8

S corp

Answer 8

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

Question 9

De jure corporation

Answer 9

Corp formed in accordance with law

Question 10

De facto corp

Answer 10

Corp laws have not been followed but may be recognized through estoppel

Question 11

De jure corp creation

Answer 11

Person, paper, act!

Question 12

De jure person

Answer 12

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

Question 13

De jure paper

Answer 13

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)

Question 14

Ultra vires act

Answer 14

Outside of biz purpose; under the MBCA, generally enforceable. UV nature of act can only be raised in 3 scenarios:

1. Shareholder may sue to enjoin proposed UV act
2. Corp may sue officer/director for damages for approving UV act;
3. State may bring action to dissolve corp for committing UV act

Question 15

De jure act

Answer 15

Incorporators have notarized articles delivered to sec of state/pay fees

Filing is conclusive proof of corp existence

Question 16

Organizational mtg

Answer 16

If initial directors names, board holds org mtg.

If not named, incorporators hold mtg.

Purpose: complete org of corp - adopt bylaws and appoint officers

Question 17

Bylaws

Answer 17

Internal doc- org’s operating manual

If conflict b/w articles and bylaws, articles control.

Amendment/repeal? Board or SH

Question 18

Internal affairs doctrine

Answer 18

IA governed by law of state of incorporation

Question 19

Entity status

Answer 19

Corp has entity status upon formation - legal person!

Question 20

Benefit Corp/ B corp

Answer 20

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

Question 21

Limited liability

Answer 21

Generally SH liable only to pay for their stock, not corp debts.
One exception!

Question 22

Defectively incorporation

Answer 22

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.

Question 23

De facto corp characteristics and requirements

Answer 23

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.

Question 24

Corp by estoppel

Answer 24

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.

Question 25

Pre-Incorp Ks (knew there was no corp!)

Answer 25

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.

Question 26

Promoter breach of fid duty arising from sales to Corp

Answer 26

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.

Question 27

Promoter’s r/ship with TPs - who bears liability?

Answer 27

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.

Question 28

Promoter’s right to reimbursement

Answer 28

Promoter held personally liable on reincorporation K may have a right to reimbursement from corp for any benefits received by corp.

Question 29

Foreign corps!

Answer 29

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.

Question 30

Issuance of stock

Answer 30

To raise money, corp can either borrow or raise it by selling stock (or both). Corp will issue a security to the investor.

Question 31

Debt securities

Answer 31

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.

Question 32

Debt terminology

Answer 32

Debt obligations may be payable to either:
Holder of the bond (bearer or coupon bond) OR
Owner registered on corp’s record (registered bond)

Question 33

Equity securities

Answer 33

When investor BUYS an ownership interest in the corp, it issues equity securities (stock).
SH is an owner, not a creditor of the corp.

Question 34

Equity terminology

Answer 34

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.

Question 35

Classification of shares

Answer 35

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).

Question 36

Share options

Answer 36

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.

Question 37

Issuance

Answer 37

Issuance of stock is when a corp sells it own stock.

Question 38

Subscriptions

Answer 38

Written offers to buy stock from a corporation.

Issue: are these offers revocable?

Question 39

Preincorporation subscription

Answer 39

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.

Question 40

Postincorporation subscription

Answer 40

Revocable until accepted by corp.

Question 41

Consideration for stock issuance

Answer 41

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.

Question 42

Amount of consideration (traditional)

Answer 42

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.

Question 43

Watered stock!!

Answer 43

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.

Question 44

Amount of consideration (MBCA approach)

Answer 44

Board determines value which will be considered conclusive if made IGF.

Question 45

Preemptive rights

Answer 45

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.

Question 46

Preemptive Right must be stated in articles

Answer 46

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.

Question 47

Limitations on Preemptive Right

Answer 47

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.

Question 48

Directors: statutory requirements

Answer 48

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.

Question 49

Staggered board

Answer 49

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).

Question 50

Director removal

Answer 50

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.

Question 51

Vacancies on BOD

Answer 51

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.

Question 52

Board Action

Answer 52

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

Question 53

Ratification of defective corporate actions

Answer 53

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.

Question 54

Board Meetings - Notice!

Answer 54

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.

Question 55

BOD Meetings - Proxies?

Answer 55

Ds CANNOT give proxies or enter voting agreement for how they will vote as Ds because Ds owe nondelegable fiduciary duties.

Question 56

BOD Meetings: Quorum

Answer 56

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.

Question 57

BOD Meetings: approval of action

Answer 57

If quorum present, only need a majority of those present to act.

Question 58

BOD Meetings: Broken Quorum

Answer 58

Quorum can be lost/broken if people leave. Once broken, board cannot act at that mtg.

Question 59

BOD Meetings: actions by unanimous written consent

Answer 59

Any action required to be taken by Ds at a formal meeting may be taken by unanimous written consent without a meeting.

Question 60

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.

Question 61

Role of the BOD

Answer 61

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.

Question 62

D&O: Fiduciary Duties, Liability, and Indemnification

Answer 62

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

Question 63

Duty of Care violation: Nonfeasance

Answer 63

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.

Question 64

Duty of care violation: misfeasance

Answer 64

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.

Question 65

Business Judgment Rule

Answer 65

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.

Question 66

Director may rely on reports/information

Answer 66

D is entitled to rely on info, opinions, reports or statements if prepared by:

1. corp officers/employees whom D reasonably believes to be competent/reliable;
2. legal counsel, accountants, others re. matters w/in professional competence;
3. committee of a board of which the D is not a member if reasonably believes committee merits confidence.

Question 67

Duty of loyalty

Answer 67

Burden on D.
Common scenarios:
1. self dealing
2. competing ventures
3. corporate opportunity doctrine

Question 68

Duty of loyalty: self dealing issues

Answer 68

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:

1. approved by majority of disinterested directors after full disclosure of material facts
2. approved by majority of votes entitled to be cast by disinterested SHs after full disclosure of material facts. NOTICE MUST DESCRIBE TRANSACTION.
3. 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.

Question 69

Duty of loyalty: competing ventures

Answer 69

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.

Question 70

Duty of loyalty: corporate opp. doctrine

Answer 70

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?

1. something in corp’s business line
2. something the company has an interest or expectancy in
3. 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

Question 71

Duty to disclose

Answer 71

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

Question 72

Loans

Answer 72

A corporation can make a loan to a D if it is reasonably expected to benefit the corporation.

Question 73

Which Ds may be liable?

Answer 73

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.

Question 74

Officers. Powers & Status

Answer 74

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.

Question 75

Officers: Duties

Answer 75

Officers are determined by the bylaws. They owe the same duties of care/loyalty to the corporation as Ds.

Question 76

Officers: Selection and Removal of Officers

Answer 76

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.

Question 77

Officers: indemnification of directors/officers/employees

Answer 77

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.

Question 78

Shareholders: mgmt and liability

Answer 78

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.

Question 79

Shareholders: special fiduciary duty in close corporations

Answer 79

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.

Question 80

SH: oppression of minority SH

Answer 80

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.

Question 81

SH: oppression of minority SH

Answer 81

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.

Question 82

Professional corporations

Answer 82

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.

Question 83

Can SH be liable for corp debts?

Answer 83

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.

Question 84

Piercing the veil

Answer 84

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:

1. alter ego - situations arise where SH treat corp assets as their own, commingle their money, etc.
2. undercapitalization - where at the time of formation, corp undercapitalized. Courts may be more willing to pierce for tort victim > K claimant.
3. 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.

Question 85

PCV - who is liable?

Answer 85

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.

Question 86

SH Derivative Suits

Answer 86

Shareholder is suing to enforce corp’s claim. ASK: could the corp have brought this suit?
Recovery? Corp gets $.

Requirements:

1. 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.
2. adequate representation - SH must also fairly and adequately represent the corp’s interest.
3. SH must make a written demand on the corp to take suitable action and has to wait 90 days.
4. 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.

Question 87

SH Direct Action

Answer 87

SH may bring direct action for a breach of fid duty owed to SH by an O or D.
Recovery? SH gets $.

Question 88

SH: voting

Who votes?

Answer 88

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

Question 89

SH: voting

exceptions

Answer 89

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.

Question 90

SH: voting

SH voting trusts and voting agreements

Answer 90

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.