Corporations Flashcards
Corporation Formation
Formed by filing articles with the secretary of state. Presumably formed for lawful purpose, any business outside of stated purpose is ultra vires.
De Facto Corporation
(1) an available statute for valid incorporation,
(2) a colorable compliance in good faith
(3) the corporation must act like a corporation
Corporation by Estoppel
Persons who treat an entity like a corporation are estopped from later claiming it was not
Alter Ego Piercing Theory
Requires:
(1) failure to observe corporate formalities (keeping adequate minutes, books, and records), and
(2) a basic injustice so that equity would require that shareholders be liable for the damages caused.
Inadequate Capitalization Piercing Theory
Inadequate capitalization at the time of incorporation
Avoidance of Obligations Piercing Theory
Avoidance of existing obligations at the time of incorporation, or fraud on creditors or other third parties.
Deep Rock - Equitable Sub
Where the corporation is insolvent and a shareholder is the owner of a debt, a judge in their discretion may subordinate the shareholder’s debt to all other debtholders (even unsecured).
Shareholder Powers
(1) Elect directors annually
(2) Amend articles and bylaws
(3) Vote on fundamental corporate changes
Shareholder Voting
(1) Requires Quorum
(2) In person or by proxy
(3) May enter into SH agreements - must be in bylaws.
(4) Can restrict transfer of shares by adding ROFR, buy back, transfer approval, prohibition of transfer to particular group.
Distributions to Shareholders
(1) dividends to shareholders,
(2) redemption or repurchase of outstanding shares, or
(3) liquidating distributions after dissolution.
Right of Inspection
Shareholders have right to inspect corporate books and records for a proper purpose reasonably related to their interest as a shareholder:
(1) investigating director/officer misconduct,
(2) waging a proxy battle, or
(3) seeking support for a shareholder initiative.
Shareholder Direct Suits
For breach of duty directly owed to the shareholder by an officer or director, or by the majority shareholders (such as failure to declare a dividend).
Majority SH Duties to Minority
(1) Majority/controlling shareholders have a fiduciary duty to minority shareholders to not act oppressively, illegally, or with fraud.
(2) Duty to not sell to looters
(3) Duty to not sell corporate offices over market for private gain
SH Derivative Suits
Suits on behalf of corporation for harm to corporation; recovery goes to corporation.
Derivative Suit Requirements
(1) standing (ownership of the stock at the time of the wrong or by operation of law from someone who owned it at the time of the wrong), and
(2) written demand and inaction for 90 days, unless demand would be futile (because all or majority of board was in breach).
Director Voting
(1) Requires quorum - valid vote needs majority of disinterested directors
Duty of Care
Requires directors act:
(1) in good faith,
(2) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and
(3) in a manner the director reasonably believes to be in the best interest of the corporation.
BJR applies
Duty of Loyalty - Conflict of Interest
Director has a conflict of interest if
(1) director or related person
(a) is a party to the transaction,
(b) has the beneficial interest in the transaction, or
(c) is the employee of entity with whom corporation is transacting business; and
(2) the transaction is of such importance it would normally need board approval.
Conflict of Interest Defense
A transaction with a potential conflict of interest will not be enjoined or result in damages if:
(1) approved by a majority of disinterested directors;
(2) approved by a majority of disinterested shareholders; or
(3) at the time, it was FAIR to the corporation.
Usurpation of Corporate Opportunities
If the corporation has an interest or expectancy in the business opportunity, a director or officer cannot take that opportunity for himself.
Common Law Insider Trading
Director has common law duty of loyalty to SHs not to engage in insider trading – purchasing or selling stock with undisclosed knowledge of a special circumstance significantly impacting the value of the stock.
Disclose or Abstain
Indemnification of Directors/Officers
Director wins.
If director prevails, director is entitled to indemnification from corporation for expenses in defending a lawsuit.
Director loses.
If the director does not prevail, indemnification depends on the nature of the lawsuit in some states, but generally, there is no indemnification permitted.
Corporate Dissolution Ways
(1) Voluntary
(2) Administrative
(3) Judicial
Administrative Dissolution
Failure to:
(1) pay corporate fees or penalties for 60 days after the due date;
(2) failure to deliver the annual statement;
(3) failure to maintain an agent for service of process;
(4) failure to notify the state of a change in the agent for service of process for 60 days.
Judicial Dissolution by Shareholders
Shareholders may ask for judicial dissolution for following grounds:
(1) deadlocked directors and threatened irreparable harm [to corporation];
(2) directors acting fraudulently, illegally, or oppressively;
(3) deadlocked shareholders and failure to elect directors for two meetings; or
(4) waste of corporate assets.
