Corporations Flashcards
1
Q
Does Corporation by Estoppel work for creditors?
A
No. Corporation by Estoppel applies to the specific transaction or the contract at hand. Used for contractual transaction only. (Fl4)
2
Q
Corporation by Estoppel + 3rd Party
A
Prevents a 3rd party who has dealt with the corporation from avoiding a contract or trying to hold officers and S-H liable by alleging deficient formation. (Fl4)
3
Q
Will a failure to have the Articles of Incorporation by SOS qualify as Substantial Performance?
A
No. A failure to have the Articles of Incorporation accepted by the SOS will generally Not qualify for Substantial Compliance. (Fl3)
4
Q
Corporation by Estoppel (Is a defense) - Defined
A
A defect in incorporation can be serious enough to deny an entity De Jure and De Facto. Nevertheless, a person who dealt with the entity as though it was a corporation, may be estopped from denying the corporate validity. (Fl4)
5
Q
What is the difference between De Jure and De Facto?
A
De Jure = Full or Substantial Compliance
De Facto = Colorable Compliance
6
Q
F-A-C-P-A-U-F-E-D
A
FORMATION / ARTICLES OF INCORPORATION / CORPORATION BY ESTOPPEL / PIERCING THE CORPORATE VEIL / ALTER EGO / UNDERCAPITALIZATION / FRAUD / ESTOPPEL / DEEP ROCK DOCTRINE
7
Q
De Jure Incorporation Defined
A
Full compliance or substantial compliance with mandatory conditions. (Fl3)
8
Q
Creditors + Issues with Formation -
They are testing you on 3 Doctrines***
A
- De Jure
- De Facto
- Corporation by Estoppel
9
Q
Bylaws
A
Govern how the corporation will operate (covers officer duties, voting, and procedure). (Fl3)
10
Q
Registration - Private Placements
A
If an issuer wants to raise money without registering, then that issuer must have a exception from registration.
If a transaction is exempt, the process of raising money for the corporation conducting the exempt transaction is often referred to as “Private Placement”
11
Q
TESTABLE ISSUE!
When a Corporation becomes Insolvent and Creditors
A
Creditors may attempt to hold S-Hs, officers, and directors liable if it can be found that there was a defect in incorporation due to a failure to comply literally with statutory procedures. (Fl3)
12
Q
Colorable Compliance
A
A failure to have the Articles of Incorporation accepted by the SOS, but a good faith attempt may be held to constitute Colorable Compliance.
(issue with signature notarized or atty failes to file…) (Fl3)
13
Q
De Facto Incorporation
(Colorable Compliance = defense)
A
Arises where there has been a good faith compliance with all mandatory conditions precedent to incorporation (Fl3)
14
Q
Howey Test
Is it an Investment Contract?
A
- Contract, transaction or scheme a person invests money.
- Made into a common enterprise
- Expectation of profits
- With profits to come solely from the efforts of others.
15
Q
What is Not a Security?
A
An investment in a general partnership (because by definition it is Not the efforts of others)
…but a limited partner in a Limited Partnership might be a security since limited partners do not participate in management.
16
Q
Characteristics of typical securities
A
- Right to receive dividends upon an apportion of profits.
- Negotiability
- Ability to be pledged or hypothecated
- Voting rights that accompany an instrument and correspond to the # of shares
- Ability to appreciate in value.
17
Q
Shareholder Liability v. Personal Liability…
A
Shareholders are not ‘personally’ liable for the actions of the corporation. (Bk35)
18
Q
What are Shareholder Suits?
A
Sometimes to enforce a right or to protect an investment, a shareholder resorts to a lawsuit. (Whit595)
19
Q
What are the 2 Categories of Shareholder Suits?
A
- Direct suits by shareholders on their own behalf;
- Derivative suits on behalf of the corporation. (Whit595)
20
Q
Name some types of Shareholder Suits (on their own behalf)
A
- to enforce the right to vote
- to sue for breach o a shareholder agreement
- to enforce the right to inspect corporate books and records
- to compel the payment of lawfully declared dividends
- to protect preemptive rights
- to compel corporate dissolution. (Whit595)
21
Q
What are some examples of Derivative Suits?
A
- to recover damages resulting from an ultra vires act
- to bar corporate officials from breaching their fiduciary duty to the corporation
- to recover improperly paid dividends
- to bar outsiders from wrongdoing the corporation or to recover from such a wrong. (Whit595)
22
Q
What is the role of the Board of Directors?
A
Board of Directors is the supreme power in the management of the corporation. (Whit595)
23
Q
The Duty of Care is related to what other Rule?
A
Business Judgment Rule.
24
Q
Duty of Care elements for a Board member?
A
a. An officer or director shall discharge his/her duties…
…in good faith…
…with the care an ordinary prudent person in a like position would exercise…
…in a manner he/she reasonably believes to be in the best interests of the corporation. (Whit599)
25
Can a shareholder give away a stock in death?
A Shareholder may give corporate stock to another after death just as he or she could have given that stock away while alive. (Whit547)
26
Meritocratic
Chosen by virtue of ability. (Whit547)
27
Corporation by Estoppel
Prevents a party who has dealt with the corporation from avoiding the contract or holding officers or shareholders liable by alleging deficient formation.
28
Consequence of Defective Formation
Common law treated the corporation as a Partnership and applied joint & several liability.
-Modernly liability imposed on shareholder who participated and liable for it. * Breach of Implied Warranty of Authority.
29
TESTABLE - What happens if the attorney negligently fails to file the Articles of Incorporation on time?
We have the Defense of a De Facto (Colorable) formation. This is an equity defense. (Do note that the state itself can seek action). (Fl)
30
Decision of the Board of Directors
-Typically, courts will not interfere with the decisions of a corporation's Board of Directors.
-The Board of Directors will have the protection of the BJR.
-In order to prevail in an action, plaintiff will need to show that the BJR does not apply by showing: fraud, illegality, conflict of interest, bad faith, waste, egregious or irrational decision-making, no decision-making or uniformed decision.
31
HOW TO WRITE: There is no indication of fraud or other malfeasance
"In this instance, there is no indication of fraud, bad faith,....A conflict of interest involves; financial/familial conflict....
-In addition there 'was' an actual decision.
32
HOW TO WRITE - claim on a decision of the Board of Directors
"This leaves only a few elements on which the plaintiff might make his case. Plaintiff might attempt to argue..... that the decision to.... is irrational, egregious and/or waste....However, the Board of Directors had a business justification for their action. They though (action) would be good......."
33
HOW TO WRITE - BJR
It does not matter taht the decision turned out to be a bad decision. The BJR will protect bad decision, as long as there was a rational basis for the decision. Plaintiff will need to show that the business justifications were 'sham'....Such a showing seems unlikely.
-Plaintiff will argue that the Board 'rubber stamps' without proper consideration. This does not seem to be the case here."
34
HOW TO WRITE - Justifying a Board decision
"The board discussed...debated.
*An exhaustive investigation/evaluation is not required. Just an informed decision. While plaintiff will try to argue differently, it is likely that the Board was sufficiently informed. Therefore it is likely that the Board will have the protection of the BJR and that plaintiff will not prevail in his suit against the Directors."
35
How do you "Cleanse" a Conflict of Interest?
The transaction must be 'cleansed' by either"
1. Vote of a majority of disinterested directors,
2.By vote of the Shareholders.
3. Showing that transaction was substantively fair (intrinsically fair)
36
Conflicts of Interests are evaluated under what duty?
The Duty of Loyalty.
37
HOW TO WRITE A 'CLEANSING'
Since the transaction was cleansed, there is no need to have a vot of the shareholders or to show fairness. The decision by the disinterested directors to approve the transaction could be challenged as a violation of the duty of care. However, assuming there was no illegality, fraud, egregious decision, waste, conflict of interest or bad faith, and assuming that the 5 directors
38
HOW TO WRITE - DUTY OF LOYALTY + BJR
'...who approved the transaction, took reasonable steps to investigate the transaction and to inform themselves, then their approval would be protected by the BJR. Therefore, it seems unlikely that the challenge to the transaction will succeed.'
39
HOW TO WRITE - Directors + responsible for general management
'...Directors are responsible for the general management of the affairs of a corporation. They have particular responsibility with respect to distributions of assets to shareholders and with respect to loans to officers and directors.'
40
HOW TO WRITE - Corporate director's job
"...it seems to me that the inherent nature of a corporate director's job necessarily implies that he must have a basic idea of the corporation's activities."
-He should know what business the corporation is in, and he should have some broad idea of the scope and range of the corporation's affairs. [The defendant should have known..."
41
HOW TO WRITE + DIRECTOR + WRONGFUL DIVERSION
"If a director actively participates in a wrongful diversion of corporate funds, he is liable on some intentional tort basis."
-"If he does not actively participate in the Wrongful Diversion, he may or may not be liable. He is Not liable Merely because he is a Director."
-"He is liable if, in the existence of due care in performing his duties as director, he should have known of the diversion and acted to stop it. In short, the issue is one of negligence."
42
Corporate Directors/Officers Rights
-Compensation
-Indemnification
-Inspection
-Derivative Suit
43
What can we 'get' members of a corporation on?
-Breach of Fiduciary Duty
-Breach of Due Care
-Breach of Loyalty
-Self-Dealing
-Conflict of Interest
-Failure to Disclose
-Waste
44
May a director delegate management duties?
It is unlawful for delegation of management.
45
Unlawful Delegation of Management is what kind of breach?
Unlawful delegation of management is a Breach of Fiduciary Duties.
46
Is a Promoter liable even if the other party knows there is no formation?
Promoter is liable even if the other party knows there is no formation. Liability whether or not the other party knows.
47
What can happen if someone got into a contract with a Promoter before formation?
Promoter can be held Individually liable.
48
Ultra Vires = Defense v. Offense
Ultra Vires is only a Defense! It is Not to be used by the other party as an Offense!
49
Can a corporation use a shareholder to sue using the concept of Ultra Vires?
A corporation cannot use a shareholder to sue using this concept. No agents of a corporation can employ Ultra Vires to avoid liability.
50
Promoter
Someone acting on behalf of the corporation that is yet to be formed. There is some liability.
51
All persons who act or purport to act on behalf of a corporation knowing there was no proper formation….
Are jointly & severally liable for all liabilities that were created while acting so liability will be imposed.
52
Bylaws
Provisions for managing and regulating the business . Can be or contain almost anything, yet cannot be inconsistent with the law. Contains the operating rules like annual shareholder meetings.
53
Under the Business Judgment Rule...
Under the business judgment rule, a court will not interfere with the judgment of a board of directors unless there is a showing of gross and palpable overreaching. A board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose. A court under such circumstances will not substitute its own notions of what is or is not sound business judgment.
Sinclair Oil Corp. v. Levien, 280 A.2d 717, 719
54
When will the Intrinsic Fairness Test be envoked?
This standard will be applied only when the fiduciary duty is accompanied by self-dealing -- the situation when a parent is on both sides of a transaction with its subsidiary.
Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720
55
Self-Dealing
Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary.
56
When can the validity of a corporate act be challenged?
The validity of a corporate action cannot be challenged on the ground that the corporation lacked the power to act, but it can be challenge in the following ways:
-In a proceeding by a shareholder against the corporation to enjoin an act;
-In a proceeding by the corporation directly against any other;
-Proceeding by the Attorney General (Aud)
57
Derivative Action
Proceeding by a shareholder against the corporation to enjoin an act. (Aud)
58
Describe the basic liability of a corporation
Limited Liability. Rarely will shareholders be held responsible. The corporation might be responsible! For shareholders to have liability it requires Piercing the Corp Veil. (Aud)
59
What is the Business Judgment Rule?
There is a presumption that any business decisions are made in good faith and designed to promote the best interests of the corporation.
*Liability will rarely be imposed on directors for bad judgment as long as they were acting with disinterest, in good faith, with due diligence and that the decision was genuinely made in the best interest of the corporation. (Aud)
60
When will a court, pierce the corporate veil?
A situation where the court would spot a basic unfairness and would then impose individual liability for:
-Undercapitalization
-Disregard for corporate formalities
-Little participation by other shareholders
-Failure to pay dividends while still paying substantial sums to the dominant shareholders.
*There is no need for any fraud to occur. Just a sort of blatant unfairness. (Aud)
61
Define Alter Ego
A mere tool of the parent corporation to exist solely to shield parent shareholders from liability. (Aud)
62
What is the Corporate Opportunity Doctrine and what does it mean for directors?
If there is an opportunity presented to an officer which the corporation is financially able to undertake and;
-Is in line with the corporation's business
-Is a practical advantage to the corporation
-One in which the corporation has an interest and by embracing the opportunity the self-interest of the director will be brought into conflict with his corporation then;
The director is forbidden from taking the opportunity for himself. (Aud)
63
When and How does a corporation come into existence?
A corporation will not exist until the Articles of Incorporation are properly executed and filed with the Secretary of State. (Aud)
64
Briefly describe the 3 ways in which a corporation can end?
-Voluntary
-Administrative
-Involuntary (Aud)
65
Voluntary Dissolution
Both the Board and the Shareholders must vote to dissolve the corporation. If approved, the corporation will have to dispose of creditor's claims (written notice & publish) (Aud)
66
Administrative Dissolution
Occur if the corporation fails to pay franchise tax or fails to file an annual report. , the Secretary of State can dissolve it. (rare) (Aud)
67
Involuntary Termination
Courts have the option to dissolve a corporation if a proceeding is initiated by the AG's office claiming the corporation obtained their Articles by fraud or that the corporation has exceeded or abused it authority.
If a shareholder files suit citing the directors are deadlocked in the management and the irreparable injury to the corporation is occurring. (Aud)
68
If a Director can demonstrate that they have they acted with good faith and an inherent fairness, they will Not be liable.
Question: Briefly describe the concept of fairness in this context?
Fairness includes fair dealing and fair price.
-Fair Dealing concerns when the transaction was timed, how it was initiated, negotiated and disclosed and how any approval was ultimately obtained.
-Fair Price is the economical considerations of the merger, such as assets, market value, earnings and other elements that could affect the inherent value of a company's stock. (Aud)
69
BJR and Gross Negligence
Under the business judgment rule director liability is predicated upon concepts of gross negligence. The concept of gross negligence is also the proper standard for determining whether a business judgment reached by a board of directors was an informed one.
70
the infirmity of the board's action,
Notwithstanding the infirmity of the board's action,
71
The production of weak evidence when strong is, or should have been available....
The production of weak evidence when strong is, or should have been, available can lead only to the conclusion that the strong would have been adverse.
72
What is a Security?
Note
Stock
Bond
Option
Debenture
Evidence of Indebtedness
Subscription
Investment contract
Voting trust certificate
73
Exempt Securities
+ Those sold under Regulation A
+Intrastate xactions
+Short term commercial paper
74
Enterprise Liability (aka Piercing the Corporate Wall)
- Question to Ask Yourself…
Are two or more nominally separate sister corporations really operating as a single enterprise? (Ace 67)
75
Subsidiary & Piercing the Corporate Veil l Key Words
-Totality of the Circumstances
-Interlocking Boards of Directors
-Alter Ego
-Substantial Domination
76
Enterprise Liability (‘Horizontal Piercing’ aka Piercing the Corporate Wall)
A creditor claims there are several related corporations and all or some are realty part of the same corporation. (Ace 67)
77
Creditor of a corporation and Other Personal Claims against the Shareholder
-Actual Fraud
-Fraudulent conveyances/transfers
-Improper dividends
-Negligence
-Personal guaranty of a corporate obligation by a Shareholder (Ace 69)
78
Shareholder and Negligence
If a shareholder, on behalf of a corporation, commits a negligent act and someone is injured as a direct result of that act, the injured party may sue the corporation, but may also sue the negligent individual. The fact that the individual also happens to be a shareholder of the corporation will not shield him or her from liability. (Ace 70)
79
Piercing the Corporate Veil Key Terms
-Shareholders normally have the corporate shield, but here the Shareholder Ce comes personally liable.
-Shareholder = Liability Shield in the corporation
-Piercing the Veil, Shareholder becomes PERSONALLY Liable for the debts of the Corporation.
-Disregard the protection of the corporation. (Ace 70)
80
Capital Structure of a Corporation
Money invested + money lent
The capital structure includes equity and debt as well. (Ace 73)
81
What are Dividends?
Dividends represent payments of money or property by the corporation to its Shareholders. (Ace 73)
82
What is FIDUCIARY DUTY?
These duties create parameters within which the conduct of a corporation’s officers and directors are measured. There are two types of Fiduciary Duty = Duty of Care + Duty of Loyalty. (Ace 83)
