Corporations Flashcards
shareholders/ stockholders
owners of the corp
risk only th einvestment that they make in the business to purchase their ownership interests
board of directors
group in charge of management of the corporation
officers
agents who carry out corp’s policy
formation requirement
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
bylaws
internal document
Operating manual for corp
Not filed with state
Articles govern if conflict
Board of shareholders cab amend, repeal, and adopt
organizational meeting
Purpose is to complete the orginization of corp
Adopt initial bylaws
Appt officers
internal affairs doctrine
internal affairs of corp are governed by the law of the state of incorporation
entity status
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
double taxation
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
limited liability
Shareholders only liable to pay stock not debts of corp
Corporation itself responsible for its debts
defective corporation
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
pre incorporation K ( knew there was not a corp)= promoter, liability
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
foreign corp
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
issue a security to investor terms
Debt securities: Corp borrows money ( bonds)
Equity securities : Corp sells ownership interest (stock)
Issuance: corp sells its own stock
subscription
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
classification of shares
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
Consideration
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
director requirements
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
board action (mthods, notiice, proxies, meeting requirements, role)
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
Actions Committees can’t take
declare a distribution
fill a board vacancy
recommend a fundamental change to shareholders
Fiducuciary duties owed by directors to corp
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
duty of care ( burden on P)
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
duty of loyalty (burden on D)
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
corporate opportunity
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
may not take a business opportunity for own when
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
may take the opportunity where
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
determining director liability
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
officers (duty, roles, removed)
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
indemnification
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
closely held corp
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
professional corp
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
piercing corporate veil
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
derivative suits
shareholder sues to enforce corp’s claim
direct suit= shareholder individually hurt
erivative ssuit outcomes
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
requirements to bring a derivative suit
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)
corp joined as D
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
outstanding share voting
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
proxy shareholder vote
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
shareholder voting trust
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
shareholder voting (pooling) agreements
Must be in writing and signed
Specifically enforceable ?
Increasingly yes
where vote
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
what shareholders vote on
Elect directors
Need plurality vote
Remove directors
Need a majority vote of shares actually voted on
On fundnmental corp changes
how shareholders vote
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
stock transifer restrictions
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
shareholder’s inspection rights
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
shareholders distributions
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
Article eliminating personal liability
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
