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agency, partnerships & llcs, corporations > CORPORATIONS > Flashcards

CORPORATIONS Flashcards

1
Q

corporations questions fall into five main fact patterns/topics:

A
  1. organization of a corp
  2. stock isssuance
  3. directors and officers
  4. SHs
  5. fundamental corporate changes
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2
Q

corporation

A

legal entity separate from its owners

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3
Q

main characteristics of corporations

A
  • centralized mgmt (centralized in a board of directors who delegate day to day mgmt to corporate officers; mgmt is not spread among owners/shareholders)
  • limited liability (only the corp itself can be liable for its obligations; SHs, board members and officers are generally not liable for corp’s obligations)
  • transferability of ownership: shareholders can freely transfer their shares unless barred by articles or bylaws
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4
Q

continuity

A

corporations can exist in perpetuity (changes in ownership don’t impact its existence)

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5
Q

formation of a corporation

A
  • corp is formed when articles of incorp are filed with state
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6
Q

articles of incorporation requirements

A

must include:
- name (corp name)
- shares (max # of shares corp is permitted to issue)
- name and address of each incorporator (ppl who undertake to form the corporation)
- registered office and agent (the company’s legal representative)

a corporation formed in accordance with applicable laws = de jure corporation

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7
Q

corporation’s purpose in the articles of incorporation

A

a statement of purpose in the articles of incorporation
- most states use boilerplate language to engage in any lawful purpose
- a corp that includes a narrow purpose can’t take action unrelated to that purpose

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8
Q

ultra vires acts

A
  • where a corp acts outside of its stated purpose, it takes ultra vires acts
  • under modern law, ultra vires acts are generally enforceable
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9
Q

three consequences of ultra vires act

A
  • SH suit to enjoin the ultra vires act
  • corporation may sue an officer or director responsible for the act for resulting damages
  • state can bring action to dissolve the corp
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10
Q

bylaws

A
  • written rules for managing the corp
  • adopted by board of directors or incorporators
  • shareholders can amend initial bylaws
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11
Q

bylaws conflict with articles of incorp

A

articles control

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12
Q

promoter

A
  • promoter acts on behalf of a not-yet-formed corp to get capital commitments (funding), usually by forming contracts with parties interested in being shareholders upon formation
  • promoter liability - personally liable for K’s he enters into on behalf of the not yet formed corp and remains liable after formation (absent novation); promoter has right to reimbursement from corporation to extent of any benefits received by corporation
  • corp doesn’t become liable unless it expressly or impliedly adopts the contract
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13
Q

novation exception to promoter liability

A

agreement among all 3 parties (promoter, corporation, and other contracting party) to release promoter from liability and substitute the corp for the promoter in the K

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14
Q

de facto corp

A
  • if incorporators thought they formed a corporation but failed to do so, they’d be personally liable for business debts
  • de facto corp allows incorporators to escape liability - where a corporation’s formation fails to follow proper formalities but it carries itself on as a corp, it may still be treated as a properly formed corporation
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15
Q

requirements for a de facto corp

A
  1. there must be a relevant incorporation statute
  2. came close to forming a corporation; and
  3. the business acted like a corporation

***de facto doctrine can be raised a a defense to personal liability only by person who is unaware that there was no valid incorporation

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16
Q

corporation by estoppel

A
  • people who treat business as a corporation cannot say it’s not a corporation… so your suit against them individually will lose (after you find out they’re not actually a corporation)
  • applies only in contract cases
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17
Q

securities

A
  • corps get funding through issuing securities
  • two main types of securities: debt and equity
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18
Q

debt securities (bonds)

A
  • corp borrows funds from outside creditor and promises to repay creditor; you give money to the coproration for a debt security
  • holder of debt securities is a CREDITOR of the corporation
  • holders of debt securities have no ownership interest
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19
Q

equity securities (stock)

A

when investor buys ownership interest in corporation, it issues equity securities; the investor holds shares of stock

  • holders (SHs) become part owners of the corp
  • authorized shares: max # of shares the corp may issue, set forth in articles of incorp
  • issued shares: shares that have been sold to investors
  • reacquired shares: those that corp buys back (goes back from being issued to authorized)
  • outstanding stock: shares that the company issued but hasn’t reacquired
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20
Q

classes of shares

A
  • corporation can issue only one type of share - giving each shareholder an equal ownership right (common shares)
  • corps can choose to issue different classes of shares
  • articles must authorize each class and set forth: (1) # of shares for each class; (2) designation for each class; and (3) describe rights given to each class of shares
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21
Q

subscriptions v. issuance

A
  • issuance of stock is when corp sells its own stock
  • subscriptions: written OFFERS TO BUY STOCK from a corporation
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22
Q

consideration for shares

A
  • shares can be issued by the corp in exchange for ANY tangible or intangible property or benefit to the corp (i.e., you can give services to the corp for shares)
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23
Q

stock transfer restrictions

A
  • stock can be subject to a transfer restriction – requires her to offer it first to the corporation (S sells stock to X, third party, in breach of agreement)
  • restrictions are valid if reasonable – just requires SH to offer stock first to the corporation
  • if restriction valid, it can be enforced against transferee (X in our example) – if the restriction is noted on stock certifiate or X had knowledge of the restriction at time of purchase
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24
Q

shareholders inspection rights

A
  • SH has right to inspect and copy books and records of the corporation
  • unqualified right for certain records – corp’s articles and bylaws; minutes of SH meetings; etc. (SH must make written demand at least 5 business days in advance)
  • for other things such as excerpts of minutes of board meetings, accounting records, SH must state proper purpose
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25
Q

directors’ inspection rights

A
  • directors don’t have to go through this to access corproate books and records
  • directors have unfetted access
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26
Q

distributions

A
  • payments by the corporation to shareholders
  • corporation can distribute assets in the form of dividends, redemption of shares (forced sale to the corp at a price set in articles), distribution of assets upon liquidation
  • at least one class of shares must be entitled to get corp’s assets upon dissolution - beyond that, it’s discretionary
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27
Q

decision to declare distributions

A

decision is solely within directors’ discretion

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28
Q

when does a SH have a “right” to a dividend or other distribution

A

only when the board declares it

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29
Q

which SHs get dividends?

A
  • registered shareholder of the share (as of record date) will get the dividend
  • example: board of directors declares dividends totaling 400k; who gets dividends if the outstanding stock is 100k shares of common stock?
    they get $4 per share!

note: shares of preferred = paid first (subtract this from the dividends first)

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30
Q

which funds can be used?

A

corporation can’t make a distirbution if it is insolvent or if the distribution would make it insolvent

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31
Q

liability for unlawful distributions

A
  • directors are jointly and severally liable for improper distributions
  • director who votes for a distribution that violates above rule is personally liable to the corp for amount of the distirbution that exceeds what could’ve been properly given out
  • directors have good faith reliance defense!
32
Q

power of SH to run day to day affairs of their corporation

A

SHs have NO such power; that power is vested in the board of directors and SHs have power to elect the board

33
Q

piercing the corporate veil/disregarding corporate entity

A
  • generally SHs, directors and officers are not personally liable for corp obligations, but they can under this doctrine
  • when the court pierces the corporate veil, the corp entity is disregarded to hold shareholders liable for what the corporation did; creditors usually request to pierce the veil

ONLY IN CLOSE CORPORATIONS (few SHs and stock isn’t publicly traded) ONLY

34
Q

acts justifying piercing the veil

A
  1. ignoring corp formalities: where a SH dominates the corp to the extent that corp is not being treated as a separate entity (e.g., corp entity is being used as an alter ego or instrumentality of SHs)
  2. inadequate capitalization: corp was underfunded at time of incorporation (insolvency that occurs shrotly after formation is a good indicator)
  3. fraud or illegality: corp entity may be disregarded if there’s fraud or other illegality
35
Q

liability re piercing the veil

A
  • once veil is pierced, only active shareholders are liable (joint and several liability)
36
Q

SH meetings

A
  • annual: corp must hold annual meeting for electing directors and other special matters
  • special meetings: may be called to conduct biz requring SH approval
  • notice required: notice of a meeting must be sent to SHs eligible to vote
37
Q

SH voting

A

get to vote on 3 things: elect directors, to remove directors, on fundamental corporate changes

  • quorum required – must be present for a vote to be cast (at least a majority of shares entitled to vote are present; NOT THE NUMBER OF SHAREHOLDERS)
38
Q

if there is no quroum represented at the meeting

A
  • shareholder action is invalid
  • unless there’s unanimous written consent by holders of all voting shares
39
Q

if SH action doesn’t concern election of a director

A
  • if shareholder action does NOT involve election of a director – if votes cast within the voting group favoring action exceed votes cast opposing action, then action approved
40
Q

board of director elections

A
  • elected by plurality (person who gets more votes for seat on board than anyone else is elected!)
  • cumulative voting may be used if allowed by the articles
41
Q

if no cumulative voting (straight voting)

A
  • each SH gets one vote per share for each available position
  • SH has 50 shares; 3 directors being elected; SH gets 50 votes for position 1; 50 votes for position 2; etc.
42
Q

cumulative voting

A
  • usually only comes up in close corporations
  • e.g., SH has 50 shares; 3 directors are being elected; SH gets 150 cumulative votes; can vote all 150 votes for one candidate for one position
43
Q

who votes?

A
  • SHs of record on the record date may vote at the meeting (record date is fixed by the board of directors)
  • each outstanding share is entitled to one vote
44
Q

SH proxies

A
  • SHs can vote their shares via proxy executed in writing
  • appointment of a proxy is revocable; it’s irrevocable if it is COUPLED with an interest and clearly states that it is irrevocable
45
Q

SH suits

A
  • SH can sue corporation (either directly or through a derivative action)
46
Q

direct suit

A
  • rare but can occur where a corp, its officer or director caused harm to, or breached duty owed to, particular SH; any recovery is for benefit of individual SH
47
Q

derivative suit

A
  • SH can sue to enforce the corps rights when the corp has a cause of action but fails to pursue it (suit brought by SH, on behalf of the corp, against the corp)
  • arises where a director or officer breaches a duty owed to corp but corp hasn’t taken action
  • ask: could the corporation have brought this suit? if yes, it’s a deriv suit
48
Q

derivative suit requirements

A
  • (1) SHs bringing suit must have been SHs at time of alleged wrong
  • (2) SHs need to make written demand and wait 90 days before filing suit (unless corp has already rejected SH demand or irrep injury will result)
  • recovery goes to corp (SHs can get legal expenses)
49
Q

corporation’s board of directors

A

generally responsible for corporations management (sets policy, declares distributions, determines when stock will be issued, recommends changes to shareholders, etc)

50
Q

board of director characteristics

A
  • # of directors is provided for in bylaws or articles (must be at least 1 director)
  • elected by SHs at annual SH meeting
  • may be removed with or without cause by SHs unless articles provide for removal only with casue
51
Q

board of director meetings

A
  • board may hold reg or special meetings
  • notice: reg meetings may be held without notice but special meetings require 2 day notice
  • quorum: consists of majority of # of directors in corporation
    if quorum is present at a meeting, passing resolution requires only majority vote of those present
  • action without meeting: board of directors can take action without a meeting if all directors give written consent describing action taken
52
Q

directors’ power to bind the corporation in contract

A

needs actual authority to act

can arise only if:
1. proper notice was given for a directors’ meeting, quroum was present, and majority of directors approved action, OR
2. unanimous written consent of directors (action without meeting)

53
Q

board of directors delegating authority

A
  • directors do not run day to day of the corp but rather delegates the mangement to officers
  • board of directors can create commitees
54
Q

duty of care and business judgment rule

A
  • directors and officers owe the corp a fiduciary duty of care
  • two situations: when director does nothing (lazy) or director makes decision that hurts business
  • if director/officer breaches duty of care, they can be personally liable for damages

MUST show that breach caused loss to the corporation

55
Q

business judgment rule

A
  • in determining whether that duty was breached (duty of care), courts apply the BJR
  • courts will NOT second guess a poor/wrong decision made by director or officer if the decision was made in a way that the director/officer believed to be in best interests of corp
56
Q

duty of loyalty

A
  • directors and officers owe a duty of lotyalty to the corp (bars them from profiting at expense of the corp); they must act in the best interest of the corporation
  • the business judgment rule does NOT apply in duty of loyalty cases
57
Q

conflicts of interest

A
  • officer/director has a personal interest in some transaction in which corp is a party
  • common scenarios: conflicting transactions/self-dealing (corp on one side and one of its directors/director’s close relative on the other side); competing ventures (a director can’t compete directly with her corporation)
  • safe harbors: officer/director with potential conflict in a transaction will not be liable if transaction is either (1) fair to the corp, or (2) approved by either disinterested SHs or majority of disinterested board members

IT IS IMPERATIVE THAT THE DIRECTOR DISCLOSED ALL MATERIAL FACTS TO THE BOARD OR THEY WERE KNOWN WHEN BOARD APPROVED TRANSACTION

58
Q

corporate opportunities

A

fiduciary duties prevent officers/directors from diverting a business opp to themselves where:

1) corp would have an interest/expectancy in the opportunity, and
2) officer/director does not give corp an opp to act first

***whenever facts mention that director learns of a business opportunity, consider whether corporation would be interested; if so, she must present it to her corporation, disclosing all material facts and can take advantage only if corp decides not to pursue it

59
Q

personal liability of directors may be limited (exculpatory provisions)

A
  • articles may limit or eliminate directors’ personal liability for money damages to the corp or SH for actions taken
  • exceptions: received benefit not entitled to; intentional harms to the corp or SHs; etc
60
Q

which directors may be liable?

A

director is presumed to concur with board action unless her dissent is noted in writing

61
Q

officers

A
  • agents of the corporation - whether she can bind corporation is determined by whether she has agency authority to do so
  • selected and removed by the board
62
Q

indemnification/reimbursement of directors, officers, employees — officer or director was sued and has incurred costs

A
  • no indemnification: corp cannot indemnify director who received improper benefit or held liable to the corp
  • mandatory indemnifcation: corp must indemnify director/officer who was successful in defending proceeding on the merits
  • permissive: corp CAN indemnify director for litigation expenses incurred in unsuccessfully defending a suit brought against director if director acted in good faith and believed her conduct was in best interests of the corporation

**determination whether to indemnify is to be made by a disinterested majority of board

63
Q

fundamental corporate changes

A
  • board cannot do them alone (e.g., merging into another company; dissolving; amending the articles, etc)
64
Q

General procedure for fundamental corp changes

A
  • (1) board action adopting resolution of fundamental change
  • (2) board submits proposal to SHs with written notice
  • (3) SH approval (SH vote required is a majority of shares entitled to vote)
  • (4) articles of change filed w/ state
65
Q

mergers

A

blending of one or more corporations into another corporation – the latter corporation survives

66
Q

requirements for approval of mergers

A

require each corp to get approval of:
- board
- shareholders (exception: surviving corp’s SHs need not apporove of a merger where surviving corp has no signifcant changes–articles do not differ post-merger, etc)

67
Q

effect of merger

A

surviving corp owns all property and assumes all obligations of prior separate entities

68
Q

short form merger

A

where a parent corp owns at least 90% stock of a subsidiary, the subsidiary can be merged into parent corp without approval of either corp’s shareholders

69
Q

dissenter’s rights and mergers

A
  • dissenting SHs can challenge the merger or demand payment for their shares at a fair value
  • mutual notice reqired: before a vote is taken on the merger, (1) corp must give SHs notice and SHs must give notice of their intent to demand payment
  • (2) must not vote in favor of change and (3) demand payment after change is approved
  • if approved, corp must pay dissenters fair market value for their shares
70
Q

dissolution

A
  • termination of corp’s existence
71
Q

voluntary dissolution by corporate act v. dissolution by initial directors or incorporators

A
  • corporate act – corp may dissolve by a corporate act approved under fundamental change procedure – need board of director action, SH approval
  • dissolution by incorporators or initial directors – if shares haven’t been issued or business hasn’t started, majority of incorporators or directors may dissolve corp
72
Q

effect of dissolution

A
  • corp continues to exist while it winds up and liquidates its affairs (no other biz can be carried out)
73
Q

administrative dissolution

A

action brought by state to dissolve corp (usually occurs due to failure to adhere to statutory requirements or formalities)

74
Q

judicial dissolution

A
  • action by AG or shareholders
  • AG: can act to dissolve a corp on basis that it abused its authority, committed fraud, etc.
  • shareholders can seek judicial dissolution where: (1) deadlock among directors or SHs; (2) corp has abandoned its biz and failed to dissolve, or (3) corp’s assets are wasted for non-corp purpose
75
Q

creditors can seek judicial dissolution

A

if creditor’s claim has been reduced to judgment; it hasn’t been satisfied; and corporation is insolvent

76
Q

disposition of property

A
  • where corp sells, leases or disposes of all or substantially all property outside regular course of business
  • it’s a fundamental corporate change for the SELLING CORP ONLY / dissenting rights of appraisal for SHs of the selling corporation
  • requires shareholder approval of the selling corporation; board approval by both corporations

agency, partnerships & llcs, corporations (3 decks)

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