Corporations

Question 1

shareholders/ stockholders

Answer 1

owners of the corp
risk only th einvestment that they make in the business to purchase their ownership interests

Question 2

board of directors

Answer 2

group in charge of management of the corporation

Question 3

officers

Answer 3

agents who carry out corp’s policy

Question 4

formation requirement

Answer 4

person - incorporators , 1+ ppl to form, execute articles and deliver t secretary of state

paper- articles of incorporation
Name : corporation,, incorporation, company, limited
Address and name of incorporated
Registered agent name and address to receive
Information involving stock
Different class
Number of max stock

Act- deliver articles to secretary of state with required fees

Question 5

bylaws

Answer 5

internal document
Operating manual for corp
Not filed with state
Articles govern if conflict
Board of shareholders cab amend, repeal, and adopt

Question 6

organizational meeting

Answer 6

Purpose is to complete the orginization of corp
Adopt initial bylaws
Appt officers

Question 7

internal affairs doctrine

Answer 7

internal affairs of corp are governed by the law of the state of incorporation

Question 8

entity status

Answer 8

corp is legal person
Benefit corp = formed for profit and pursue benefit to a broader social policy cause
Work just like regular corp
Articles must say a benefit corp

Question 9

double taxation

Answer 9

Corp pay income tax
Shareholder pay income tax
S corporations
Dont pay income tax a corp level
No more than 100 members none are partnerships

Question 10

limited liability

Answer 10

Shareholders only liable to pay stock not debts of corp
Corporation itself responsible for its debts

Question 11

defective corporation

Answer 11

Wrongly thought was a corp = personally liable for debts

Defacto corp requirements
Relevant incorp statute
Good faith colorable attempt to comply
Act like a corp
Treated like corp for all purposes except in action by state called quo warranto action

Corporation by estoppel
Not de jure corp, but treated that way for ppl who treated business like corp
Only apply in K cases

doctrines are abolished

Question 12

pre incorporation K ( knew there was not a corp)= promoter, liability

Answer 12

Promoter = person acting on behalf of corp not yet formed
Procure commitments for capital and other instrumentalities that will be used by the corp after its formation

Liability for preincorporation K
Corp: liable only if it adopts
Express: by resolution by the board of directors with knowledge of the material facts
Implied: by acquiescence or conduct normally constituting estoppel, such as accepting the benefits of the contract if done with knowledge of the material facts

Promoter: liable until novation ( agreement that corp replace promoter under contract)
EXCEPTION: not be liable on a preincorporation K if the agreement b/n the parties expressly indicates that the promoter is not to be bound

Question 13

foreign corp

Answer 13

If transacting business in state, must qualify and pay prescribed fees
Foreign = any business outside of state
Transacting business = regular course of intrastate business activity
Registering
Register with secretary of state in which it wishes to transact business
Provide info about articles
Prove good standing in home state
Dont register = civil fine and cant sue , but can be sued

Question 14

issue a security to investor terms

Answer 14

Debt securities: Corp borrows money ( bonds)
Equity securities : Corp sells ownership interest (stock)
Issuance: corp sells its own stock

Question 15

subscription

Answer 15

Written offers to buy stock from corp
Preincorporation subscription
Irrevocable for 6 months unless otherwise provided or all subscribers agree to let you revoke
Postincorporation subscription
Revocable until accepted by the corp
Obligated under agreement when board accepts offer

Question 16

classification of shares

Answer 16

common shares = each shareholder equal ownership rights
when divided into share articles say what class is and how many

authorized shares: shares descrived in corp’s articles
issued and outstanding= share sold
authorized but unissued = repurcahse/redemption shares

Question 17

Consideration

Answer 17

form : any tangible or intangible prop or benefit to the corporation

Amount: par= min issuance price
Watered stock , occur when par value stock is issued for less than its par value
Person who bought stock is liable
Directors liable if knowingly authorized the issuance

Board determines value
Valuation is conclusive if made in good faith

Preemptive rights
Right of existing shareholder to maintain % of ownership by buying stock if there is a new issuance to maintain her %
New issuance must be for money
Right must be stated in article

Question 18

director requirements

Answer 18

Adult natural persons
One or more
Initial directors named in articles/elected by incorporators

Shareholders elect thereafter
Shareholders can remove directors
Removable with or without cause
Exception : staggered board, only with cause
If shareholders create vacancy then generally replace

Question 19

board action (mthods, notiice, proxies, meeting requirements, role)

Answer 19

Must act as a group

Methods of action
Unanimous agreement in writing
At a meeting
Conference call counts as meeting

Notice for meeting
Regular meeting : no notice
Special meeting : must give at least 2 days notice of date time and place of meeting need not state purpose

Directors cannotgive proxies or enter into voting agreements
Directors own nondelegble fiduciary duties

Meeting requirements
Quorum: majority of all directors
Majority of those present required to pass resolution
if ppl leave quorum could be broken

Role
Does big management decisions
Can delegate to committee
Can recommend on things committe can’t act

Question 20

Actions Committees can’t take

Answer 20

declare a distribution
fill a board vacancy
recommend a fundamental change to shareholders

Question 21

Fiducuciary duties owed by directors to corp

Answer 21

Discharge duties in good faith & reasonable belief that actions are in best interest of corp
Duty of loyalty

Use care that prudent person in like position would reasonably believe appropriate under circumstances
Dutty of care

Question 22

duty of care ( burden on P)

Answer 22

Nonfeasance: director does nothing
Show causation

Misfeance: board makes decision that hurts business
Causation clear
Director not liable if meet business judgment rule ( corp did appropriate Homework)

Business judgment rule
Ct will not second guess business decision if made in good faith, informed, had rational basis, made according to their duty of care and duty of loyalty

Question 23

duty of loyalty (burden on D)

Answer 23

Conflict of interest
any transaction b/n corp on one side and directir ir close relative or other director buiness on other side
- okay if majorityof disinterested voted it was okay given all material info
- some cts also require a showing of fairness

Business judgment rule doesnt apply

No Self -dealing/interested director transaction

Corporate opportunity

Question 24

corporate opportunity

Answer 24

GR: the director or senior executive may not take adv of a corporate opportunity unless
Director or senior executive 1st offers the opportunity to the corporation and makes disclosure concerning the conflict of interest and the corporate opportunity
Opportunity rejected by the corporation and
Either
Rejection is fair to the corporation
Opportunity is rejected in adv following disclosure by disinterested directors or
Rejection authorized in adv or ratified …. And rejection is not equivalent to a waste of corporate assets

Question 25

may not take a business opportunity for own when

Answer 25

The corporation is financially able to exploit the opportunity

The opportunity s w/i the corporation’s line of business

The corporation has an interest or expectancy in the opportunity and

By taking the opportunity, director/ officer is in a position not compatible with duties to corporation

Only required to consider the facts only as they existed at the time he determined to accept the offer

Question 26

may take the opportunity where

Answer 26

Opportunity is presented to director in her individual role, and not in her role as director

Opportunity is not essential to the corporation

Corporation has no interest or expectancy in the opportunity

Director has not wrongfully employed corporate resources in pursuing the opportunity

Question 27

determining director liability

Answer 27

director presumed to concur with board action unless dissent// abstention note in writing in corp records

Director not liable under rule if absent from board meeting

Question 28

officers (duty, roles, removed)

Answer 28

Officers owe same duty of care and loyalty as directors
Is agents of corp

Roles
One person can simultaneously serve in more than one office

Officers are selected and removed by board
Remove with or without cause
Breach K officer had = remedies
Shareholders do not hire and fire officers

Question 29

indemnification

Answer 29

Category 1: Corp cannot indemnify if D/O held liable to corp or improper benefit
Category 2: corp must indemnify D/O successful in depending on merits or otherwise
Category 3: Corp may indemnify D/O shows acted in good faith believed conduct in best interest of corp
Catch all
If D/O does settlement it would fall here

Court order indemnification
If justified in view of all circumstances
D/O held liable, reimbursement limited to costs and attorneys fees

Limitation on liability
Articles can eliminate D/O liability only for duty of care cases

Question 30

closely held corp

Answer 30

Small # of shareholders
Stock not publicly traded

Shareholders can manage directly
Shareholder management agreements
In articles and approved by all shareholders OR
Unanimous written shareholder agreement
Agreement noted on front and back of stock certificate = failure doesnt affect validity
Whoever manages corp owes duties of care and loyalty

Shareholders in close corp owe a fiduciary duty of utmost good faith
Controlling shareholders cannot use power to benefit at expense of minority shareholders
Oppression of minority shareholders = they can sue controlling shareholders who oppress them for breach of this fiduciary duty

Question 31

professional corp

Answer 31

Name must include one of phrases or PC or PA
Articles state purpose is to practice particular profession
Corp directors, officers, and shareholders must be licensed professionals
Personally liable for malpractice
Shareholders not liable for each others malpractice
Cant be liable for debts
Maybe personal liable for what corp did

Question 32

piercing corporate veil

Answer 32

Doctrine allows shareholders to be sued for debts of corp
Available only in close corporations
Shareholders have abused the privilege of incorporating
Fairness requires holding them liable

Two common fact patterns
Alter ego
Commingled funds
corporation is mere “alter ego” of owner
Corporation is same as shareholder
Recognizing corporation as separate entity would lead to unfair result

Undercapitalization
Undercappitalized when form
Shareholders failed to invest enough to cover prospective liability

Cts are more willing to pierce corporate veil for a torts victim than for a contract claimant

Question 33

derivative suits

Answer 33

shareholder sues to enforce corp’s claim

direct suit= shareholder individually hurt

Question 34

erivative ssuit outcomes

Answer 34

Money from judgment goes to corp
P recovers costs and fees only

Loses
Liable for D’s fees if sued w/o reasonable cause
Other shareholders barred from suing on same transaction again

Question 35

requirements to bring a derivative suit

Answer 35

Stock ownership when claim arose and throughout suit
Or got by operation of law (inheritance or divorce degree)

Adequate representation of corp’s interest

Written demand on corp ( usually on board)
Some states always demand and cant sue until 90 days after , unless already rejected or irrerparable injury
Other states don’t have to if futile ( asking to sue themselves)

Question 36

corp joined as D

Answer 36

Ct approval required to settle or dismiss derivative suit

Corp may move to dismiss
Based on independent investing = concluded suit is not in corp’s best interest
Made by independent directors or a ct appt panel of one or more independent persons

Ct will dismiss if finds
Those recommending dismissal were truly independent
They made reasonable investigation

Question 37

outstanding share voting

Answer 37

Each outstanding share has one vote
Must be record shareholder on record date
Record shareholder = person shown as stock owner in corp records
Record date: voter eligibility cutoff date
Exception to record owner rule
Corp reacquires stock = no one vote stock bc not outstanding
Shareholder dies = executor can vote

Question 38

proxy shareholder vote

Answer 38

Proxy = writing authorizing another to vote the share , good for 11 months
Requirements
Writing
Signed by the record shareholder
Directed to secretary of corp
Authorizing another vote the shares

Revoked by
Writing to the corp secretary
Attend meeting to vote

Irrevocable proxy : only irrevocable if states that it is and is coupled w/ an interest or given as security
Must state that it is irrevocable
Holder has some interest in shares other than voting

Question 39

shareholder voting trust

Answer 39

Requirements
Written agreement controlling how shares will be voted
Give copy of agreement to corp
Transfer legal title to voting trustee
Give original shareholders trust certificats

Question 40

shareholder voting (pooling) agreements

Answer 40

Must be in writing and signed

Specifically enforceable ?
Increasingly yes

Question 41

where vote

Answer 41

at meeting or by unanimouse written consent

meeting- kinds
Annual meeting is required
Elect Directors
If not w/i 15 months can petition ct
Special meeting
10% to call

notice
Must be in writing and delivered 10-60 days before meeting
Date place and time
Special meeting
State purpose

improper notice= voidable unless waiver
Express: writing and signed any time OR
Implied : shareholders attend meeting without objecting at outset

Question 42

what shareholders vote on

Answer 42

Elect directors
Need plurality vote

Remove directors
Need a majority vote of shares actually voted on

On fundnmental corp changes

Question 43

how shareholders vote

Answer 43

Quorum
# of shares represented, not number of shareholders
GR: quorum requires majority of outstanding shares entitled to vote, unless articles or bylaws require greater
Not lost if ppl leave meeting

Cumulative voting
Method to give small shareholders better chance of electing someone to the board
Multiply number of share by number of directors to be elected
Only one at large voting
Can distribute votes how want

Question 44

stock transifer restrictions

Answer 44

Allowed if not absolute restraints on alienation

enforceable if restriction is conspicuously noted on the stock certificate or

transferee had actual knowledge of restriction at the time of the purchase

Question 45

shareholder’s inspection rights

Answer 45

Shareholder’s right to review corp books and records on written demand
Need not state a proper purpose
Noncontroversial things

To inspect controversial things
Proper purpose
One reasonably related to interest as a shareholder
5 business days advance notice
Examples
Minutes of board meeting
Corps books, papes, accounting reccird
Shareholder recorders

Directors do not need to go through same process

Question 46

shareholders distributions

Answer 46

Payments from corp to shareholders

Types
Dividend
Repurchase
Redemption: forced sale to corp at price set in articles
P must show abuse of discretion to win
Show making profits and not paying but giving self bonuses

In boards discretion when to distribute
No right to it until board declares it

Question 47

Article eliminating personal liability

Answer 47

can eliminate personal liability for money damages to SH or corp for actions taken

EXCEPTIONS
- Director received a benefit to which he is not entitled
- intentionally inflicted harm on the corp or its SH
- approved unlawful distributions
- intentionally committed a crime