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MEE DW > Corporations > Flashcards

Corporations Flashcards

1
Q

What is the business judgment rule?

A

Directors of a corporation are generally not held personally liable for decisions they make on behalf of the corporation.

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2
Q

What are the 3 prerequisites for the business judgment rule to protect a director?

A

(1) the director acted with a reasonable belief that the decision was in the best interest of the corporation.

(2) the director acted in good faith

(3) the director acted as a reasonably prudent person would under similar circumstances.

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3
Q

When will board approval relieve a director’s personal liability for engaging in personal transactions with the company for which they are a director?

A

(1) the director discloses all material facts of the transaction (and the board approves)

OR

(2) the transaction is fair to the corporation and shareholders

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4
Q

What is an exculpatory clause?

A

Exculpatory clauses in the articles of incorporation or bylaws relieve directors of personal liability to the corporation and or shareholders.

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5
Q

When will an exculpatory clause NOT relieve a director of personal liability?

A

(1) when the act of the director was illegal

(2) when the director acts to intentionally injure the corporation or its interests

(3) when the act results in illegal distributions

(4) the director improperly benefits from their own actions

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6
Q

What is the name for shares repurchased by the corporation?

A

Treasury Shares

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7
Q

Are treasury shares entitled to vote at shareholder meetings?

A

No.

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8
Q

What type of shares are generally entitled to vote at shareholder meetings?

A

Outstanding shares.

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9
Q

Are voting proxies allowed?

A

Yes, unless the proxy is irrevocable and given with a property interest or consideration.

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10
Q

How can voting proxies be revoked?

A

(1) any written instrument / notice

(2) the shareholder can also simply attend the shareholder meeting and vote their shares

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11
Q

What are the requirements for a valid proxy vote?

A

(1) authorized in writing

(2) signed by the shareholder (or a person who received the share by operation of law)

(3) proxy writing is sent to the secretary of record for the corporation

(4) the writing articulates the authorization to vote the share

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12
Q

What instruments define what percentage of votes is needed to pass a resolution at a shareholder meeting?

A

(1) articles of incorporation

Or

(2) the bylaws

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13
Q

Which document wins if the articles of incorporation and the bylaws conflict?

A

The articles of incorporation.

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14
Q

What is the primary limitation on the corporate president’s power to act and authority?

A

The board of directors discretion.

A corporate president may enter into ordinary contracts.

A corporate president may not enter into extraordinary contracts (beyond the scope of normal business) without the consent of the board of directors.

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15
Q

What powers is the board of directors unable to bestow on the president of the corporation?

A

The board of directors may not give the president powers which the board itself does not have.

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16
Q

When is a proxy authorization irrevocable?

A

(1) when the proxy writing states it is irrevocable

AND

(2) the authorization is given in exchange for consideration, as a surety, or the proxy holder has an interest in the authorization.

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17
Q

What body of law governs the relationship between the president and the corporation?

A

Agency law.

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18
Q

What general powers is the president trusted with?

A

(1) the power to act as an agent for the corporation

(2) in additional capacities authorized by the board of directors

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19
Q

What contracts may the president enter into on behalf of the corporation without board approval?

A

Ordinary contracts (contracts within the scope of normal business practices).

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20
Q

What document authorizes the scope of acts that the board of directors may take?

A

The articles of incorporation.

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21
Q

If the articles of incorporation are silent, how many directors and what percentage of those directors must vote to pass a resolution?

A

(1) a meeting and decision are valid if a quorum of the directors are present (usually a majority)

(2) a resolution will pass if a majority (of the quorum) votes in favor

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22
Q

What is required for a fundamental change to the corporation?

A

Fundamental change is only valid if . . .

(1) the board passes a resolution in favor of the fundamental changed (with quorum present)

And then

(2) a majority of shareholders approve

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23
Q

What remaining option is available to shareholders when there is a fundamental change to the corporation that they disagree with, BUT, they don’t have enough votes to prevent it?

A

Appraisal. Shareholders opposing a fundamental corporate change may force the corporation to buy back their shares.

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24
Q

What is the procedure for appraisal?

A

The shareholders must

(1) object to the fundamental change

(2) not vote in favor of the fundamental change

(3) demand in writing that the corporation given them market value for their shares.

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25
Q

What is a promoter in corporation law?

A

A person who organizes for a corporation which is not yet formed and obtains equipment, funding, land, capital. They also may enter into contracts.

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26
Q

Are promoters personally liable for contracts made on behalf of a corporation before it exists?

A

Yes.

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27
Q

Are promoters still liable for contracts adopted by the formed corporation?

A

Yes.

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28
Q

How may contracts be adopted?

A

(1) Express

Or

(2) Implied

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29
Q

When will a promoter not be liable NOT be personally liable for contracts made on behalf of the to-be corporation?

A

The contract expressly and definitively states that the promoter will not be personally liable.

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30
Q

Are corporations generally liable for the contracts entered into by promotes.

A

Generally no. The corporation is only bound if the contract is expressly or impliedly adopted by the corporation.

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31
Q

What is express adoption?

A

Written consent acknowledging that the corporation is liable for the contract.

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32
Q

What is implied adoption?

A

The corporation acts and accepts value from or the benefit of the contract with knowledge of the circumstances.

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33
Q

What is a shareholder derivative lawsuit?

A

A shareholder (or several) sues on behalf of a corporation against (1) 3rd party actors (2) officers of the corporation, or (3) a member or members of the board of directors for breaching duties owed to the corporation.

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34
Q

Who receives damages that are awarded as a result of a shareholder derivative suit?

A

The corporation itself.

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35
Q

What obligations does a shareholder have when bringing a shareholder derivative lawsuit?

A

(1) to fairly and adequately represent the interest of the corporation

(2) to demand in writing that the corporation cure the problem (unless the shareholder knows the demand is useless)

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36
Q

Who is permitted to bring a shareholder derivative lawsuit?

A

(1) one who owned shares at the time of that the transaction or occurrence occurred

(2) one who receives shares by operation of law from an owner who owned the shares at the time of transaction or occurrence.

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37
Q

What are the primary responsibilities of the board of directors?

A

(1) Appoint / hire officers

(2) manage the high-level affairs of the corporation

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38
Q

What are the 3 main duties of directors?

A

(1) to act in good faith

(2) to act in the best interest of the corporation

(3) to act with the care of a reasonably prudent person under similar circumstances.

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39
Q

Under the business decision rule, what is the legal presumption when a person alleges that a director violated their duties?

A

(1) the director was acting in the best interest of the corporation

(2) the decision was made in good faith

I.e., the accusers have the burden of proof.

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40
Q

What information may directors properly rely on when making a decision?

A

(1) Information provided from outside the corporation that one would reasonably believe to be competent.

(2) Information from corporate officers and employees that one would reasonably believe to be competent.

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41
Q

What duty is breached if a director deals personally with a corporation and improperly profits from the transaction?

A

The duty of loyalty.

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42
Q

When may a director properly have personal dealings with a corporation?

A

(1) all material aspects and facts of the transaction are disclosed

(2) the transaction is approved by a majority of either (a) disinterested board members or (b) shareholders

(3) the transaction is fair

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43
Q

For the purposes of approval, is dissolution a fundamental change of the corporation?

A

Yes!

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44
Q

What is the notice requirement for a shareholder meeting in which there will be a vote on a fundamental change?
Minimum 10 days notice.

A

Minimum 10 days notice.

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45
Q

What must be contained within the notice of a vote for fundamental change?

A

(1) Place

(2) When

(3) Description and purpose of the fundamental change

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46
Q

Can a defective notice of a meeting be waived by shareholders?

A

Yes, by going to the meeting and voting.

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47
Q

What is the effect of a defective notice that is not waived for a meeting in which a fundamental change is voted?

A

Any adopted resolution is considered voidable.

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48
Q

Who may void a resolution based on deficient notice?

A

Any shareholder (or anyone with the right to vote) who did not receive proper notice.

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49
Q

Corporation - Define

A

A distinct legal entity that (1) that can conduct business in its own right by buying, selling, and holding property or by suing and being sued (2) and lasting forever.

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50
Q

Shareholders - define

A

investors, ultimate owners of a residuary interest in corporation

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51
Q

Directors - define

A

elected by shareholders, responsible for major corp decisions, appoint officers

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52
Q

Officers - define

A

Run corporation on a daily basis

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53
Q

Promoter - define

A

(1) find investors willing to invest in corporation (2) enter into contracts on behalf of corporation (3) fiduciaries of corp (no secret profits)

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54
Q

Corporation liability w/r/t promoters

A

Corporation is not liable for pre-incorporation agreements. Promoters are personally liable for any contracts entered into before the corp exists, UNLESS:
- novation shifting liability to corp
- agreement b/w promoter, corp, 3P
- corp substituted for promoter under the agreement

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55
Q

Incorporators

A

(1) must sign and file articles of incorporation (2) pay a fee (3) not liable for promoter contracts

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56
Q

Articles of Incorporation - requirements

A
  • name of corp + “inc., co., ltd.” etc.
  • agent of corp (name, address w/i state of incorp.)
  • incorporators (names, addresses)
  • duration of corporation
  • purpose of corporation
  • authorized shares (max number for each class of stock corp can issue)
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57
Q

Ultra vires

A

Acts beyond the powers of the corp stated in the articles of incorporation. Shareholders, corporation, and state can sue to enjoin ultra vires actions. If ultra vires found, actions held unenforceable.

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58
Q

Define - articles of incorporation

A

Contract between (1) state and corp (2) shareholders and corp – establishes basic rights

59
Q

When is a corporation incorporated

A

When Sec of State (1) accepts the fee and (2) files the articles

60
Q

Bylaws - define

A

Non-obligatory rules created to govern the day-to-day management and operations of the corp

61
Q

Changing bylaws v changing articles

A

Bylaws can be changed by the board; articles may only be changed by shareholders

62
Q

Conflict between articles and bylaws

A

Articles win

63
Q

De jure corporation

A

Corporation complying with all statutory requirements for incorporation

64
Q

De facto corporation

A

Corporation will be treated as a corporation w limited liability if the organizers enter into obligations after supposed formation and (1) made a good faith effort to comply w incorp process (2) have no actual knowledge of a defect in corp status

65
Q

Veil Piercing - Rule

A

Shareholders are not personally liable for the debts of a corporation but only liable for the amount invested UNLESS court must pierce limited liability veil to avoid fraud.

66
Q

Three factors to decide whether to pierce the veil

A

(1) alter ego (2) under capitalization (3) fraud

More likely in tort and small, closely held corps

67
Q

Alter ego - define

A

Investor or shareholders fail to observe any corp formalities b/w the person and the corporation – treated company like itself (i.e., commingling of personal and company funds)

68
Q

Under capitalization - define

A

Failure to maintain funds sufficient to cover foreseeable liabilities

69
Q

Fraud - define

A

Parties engaged in fraud or fraud-like behavior

70
Q

Stock - define

A

Ownership of corp represented by shares of “stock,” which carries both voting attributes and economic rights.

71
Q

Who holds the debt of a corporation?

A

Creditors – entitled to repayment of loan+interest

72
Q

Who owns the equity in the corporation?

A

Stockholders – entitled to all value that remains in corp after debts are paid

73
Q

Classes of stock - define

A

Usually just one, but corp may have as many as they choose w diff econ and voting rights

74
Q

Preferred stock

A

preference over common stock w/r/t (1) dividends and (2) ???

75
Q

Issuance of stock - define

A

Sale of stock from corp to investing public

76
Q

Authorized Shares - define

A

(1) Max number of shares that directors of corp can sell (2) set in articles of incorp (3) must get shareholder approval to sell more

77
Q

Issue shares - define

A

number of shares from authorized shares pool that directors have actually sold

78
Q

Outstanding shares - define

A

shares that were once issued to shareholders and still remain in possession of shareholders (i.e., not reacquired by corp)

79
Q

Treasury shares - define

A

Stock previously issued to shareholders but then reacquired by corp

80
Q

Par value stock - define

A

Minimum “par value” of an issue stock - not required

81
Q

Value of consideration for stock

A

Corp can receive any valid consideration board of directors deems adequate (labor, IP rights, etc.)

82
Q

Watered stock - define

A

Stock sold for less than stated amount of par value stock

83
Q

Stock subscription - define

A

(1) agreement in adv to buy stock before corp is formed (2) irrevocable for 6 months prior to incorp

84
Q

Preemptive rights - define

A

Right to acquire stock to maintain the percentage of ownership any time new shares are issued. No preemptive rights unless negotiated or included in articles.

85
Q

Two methods to get money out of corporation? (“Distribution”)

A

board can (1) declare a dividend (2) buy back shares of the corp

86
Q

Power to authorize dividends?

A

ONLY board of directors, not shareholders

87
Q

When can the board not declare dividends?

A

(1) corp is insolvent (2) by issuing dividend, corp would become insolvent

88
Q

Unlawful dividends - effect on directors who voted to authorize

A

(1) jointly and severally liable to corp for (2) amount in excess of lawful amount (3) UNLESS director(s) relied in good faith on financial statements

89
Q

When can a shareholder not freely sell shares at any time for any price?

A

(1) closely held corps (2) federal restrictions

90
Q

Closely held corporations issuing private restrictions on sale of securities (stocks)–how?

A

(1) stock certificate contains either (2) full and conspicuously noted statement of what the restriction is OR (3) statement that says there are restrictions whose content is provided on request

91
Q

Types of restrictions on sale of stock

A

(1) outright prohibition (2) requirement of company consent (3) company has option to buy (4) company has right of first refusal

92
Q

Challenge to restrictions on sale of stock

A

Ask: is it reasonable to restrict to maintain legal status of the corp?

93
Q

10b-5 Action for Fraudulent Purchase or Sale of Stock requirements

A

(1) P purchased/sold security
(2) transaction involves interstate commerce
(3) D engaged in fraudulent/deceptive conduct (untrue statement of material fact NOT opinions and predictions)
(4) conduct related to material info (reasonable investor would find fact imp in deciding to purchase or sell)
(5) D acted with scienter (intentional or reckless NOT negligent)
(6) P relied on D’s conduct
(7) P suffered harm (causality + damages – either diff b/w stock value and price paid NOT punitive)

94
Q

16(B) Insider Trading Action elements

A

(1) Corporate insider (directors, officers, shareholders w 10+% of a class of stock)
(2) in a corp w securities traded on national securities exchange OR has assets more than $10 mil AND more than 500 shareholders
(3) who BOTH buys and sells corp stock is liable for any profits made on those transactions

95
Q

Shareholder annual meeting

A

Obligatory, annual meeting to (1) elect directors and (2) conduct other shareholder business

96
Q

Shareholder special meetings

A

called to vote upon fundamental changes in life of corp (i.e., dissolution, merger)

97
Q

Notice for shareholder annual AND special meetings

A

(1) no fewer than 10 but no more than 60 days before meeting
(2) date, time, location of meeting

98
Q

Notice requirement for special shareholder meetings

A

PURPOSE of meeting

99
Q

Insufficient notice of shareholder meeting

A

Shareholder may challenge any actions taken at meeting but WAIVED if shareholder attends meeting

100
Q

Record date - define

A

Date fixed by directors used to determine shareholder voting eligibility. Must be no more than 70 days before meeting. Only shareholders owning shares on record date can vote.

101
Q

Shareholder action w/o meeting OK with

A

unanimous, written consent

102
Q

Proxy shareholder voting

A

Authorizes others to vote shares in accordance w wishes of shareholder when (1) in writing (2) signed by shareholder as of record date (3) sent to corp sec (4) states authorization for another to vote shareholder’s shares (5) not valid for more than 11 months unless otherwise specified

103
Q

Shareholders vote on

A
  • election of directors
  • mergers
  • share exchanges
  • amendments to articles of incorp
  • sales of all or substantially all of corp assets
  • dissolution
104
Q

Shareholder approval requirements

A

(1) Quorum of shares (NOT shareholders)
- at meeting in person or via proxy
- majority of corp’s outstanding shares represented at start of meeting

(2) necessary vote
- among quorum, votes cast in favor of proposal exceed votes cast against

105
Q

Cumulative voting - define

A

Voting for ONLY election of directors that:
(1) gives shareholders votes = to number of shares owned
(2) MULTIPLIED by number of director positions being voted on

106
Q

Shareholder inspection rights

A

Rule: shareholder may inspect corp’s records in person or through an agent as long as shareholder has a proper purpose (related to shareholder’s financial interest in the corp.)

107
Q

Direct shareholder lawsuit

A

Shareholder sues (1) in own name (2) for harm directly to shareholder (i.e., interference in voting rights, dividends, misinfo) (3) damages go directly to shareholder

108
Q

Derivative shareholder lawsuit

A

(1) P first demands board bring lawsuit in corp’s name (unless it would be futile)
(2) P suing on behalf of corp
(3) P with standing (contemporaneous stock ownership – shareholder at time of harm, throughout litigation)
(4) for harm, principally, to corp (i.e., bad business decisions)
(5) damages to corp + P attorneys if litigation produces a “substantial benefit” to corp

109
Q

Shareholders’ duties to other shareholders

A

No duties (except controlling shareholders)

110
Q

Controlling shareholder fiduciary duties to minority shareholders

A

(1) sale of stock to an outsider: liability possible if (a) CS sells stock to outsider intent on looting or destroying company (2) damage to other SHs

(2) controlling shareholder transacts w the corp: CS (a) receives special distribution or (b) conducts major business transactions to own benefit (c) owes a duty of loyalty

111
Q

Controlling Shareholder - Define

A

Owns 50% + 1 or more of stock OR comparatively HUGE ownership stake

112
Q

Board of directors tasks

A
  • appoint and oversee officers
  • make high-level corp decisions
  • usually receive compensation
113
Q

Board of directors requirements

A

(1) at least one
(2) natural persons

114
Q

Board of directors - term and selection

A

(1) limited term
(2) elected by SHs

115
Q

Removal of board of directors members

A

(1) by shareholders
(2) with or without cause UNLESS
(3) classes of directors elected at diff times; then only for cause

116
Q

Replacement of board of directors members

A

(1) upon vacancy or board size increase,
(2) shareholders at special meeting OR board itself
(3) may elect new directors

117
Q

Notice for board meetings

A

(1) special meetings NOT regular
(2) attendance waives notice unless prompt object at meeting

118
Q

Voting requirements - board of directors

A

(1) quorum (majority of total number of directors unless bylaws say otherwise)
(2) with quorum, pass on a majority vote of present members
(3) no votes by proxy or agreement

OR with agreed upon, unanimous, written consent of all members

119
Q

Dissent from board decision by board member

A

(1) enter dissent in meeting minutes
(2) file written dissent before meeting adjourns
(3) provides written dissent by certified/registered mail to corp sec immediately after meeting

120
Q

Officers of corp - members

A

President, sec, treasurer

121
Q

Officers - selection process

A

By board

122
Q

Duties owed by officers to corp

A

(1) duty of care (2) duty of loyalty

123
Q

Corporate officer duty of care

A

Rule: act with care that a person in a like position would reasonably believe appropriate under similar circumstances

Exceptions: (1) Business Judgment Rule - in the absence of fraud, illegality, or self-dealing, courts won’t disturb good faith business decisions OR (2) officer relied on expertise of others

124
Q

Officer duty of loyalty

A

Rule: may not receive an unfair benefit to the detriment of the corporation w/o effective disclosure and ratification.

125
Q

Violations of duty of loyalty

A

(1) self-dealing: transaction in which director, officer, or relative receives substantial benefit directly from corp (2) corporate opportunity: usurping or stealing a corp opportunity

126
Q

Insulation from duty of loyalty liability

A

Rule: a self interested transaction may be upheld if
(1) disclosed AND
(2) ratified by either
(3) a majority of disinterested directors OR
(4) majority of disinterested shareholders

OR if the transaction was fair

127
Q

Indemnification - definition

A

Practice of a corporation paying for the costs of a director or officer’s defense in litigation, usually by purchasing insurance

128
Q

Required/Mandatory Indemnification

A

Corp is ALWAYS required to pay the costs of defense if the director or officer successfully defends the case

129
Q

Prohibited Indeminification

A

Crop may NEVER indemnify a director or officers who is liable for receiving improper benefit from the corp or otherwise loses a lawsuit

130
Q

Permissive Indemnification

A

Corp MAY indemnify a director or officer for the costs of a suit if the director or officer (1) acted in good faith w no intent to harm the corp OR (2) had no reasonable cause to believe the conduct was illegal

131
Q

Fundamental Changes to a Corporation - approval

A

requires both shareholders and directors for merger, consolidation, or dissolution

132
Q

Merger

A

the combination of two or more corporations where one corporation survives and assumes the assets and the liabilities of the other corporation

133
Q

Consolidation

A

a combination in which neither of the two corps survive because (1) a new entity is created and (2) new entity assumes the assets and liabilities of both corps

134
Q

Dissolution - definition

A

The existence of a corporation is extinguished either voluntarily by the shareholders and the directors or involuntarily by disgruntled parties.

135
Q

Involuntary dissolution

A

Creditors can dissolve if the creditors show the corporation is not paying its debts. OR

Shareholders can dissolve if they can show (1) corporate assets are being wasted (2) directors are acting fraudulently (3) or directors and shareholders are deadlocked.

136
Q

Fundamental changes process requirements

A

(1) board must adopt a resolution proposing the change
(2) notice must be sent to shareholders of special meeting and
(3) fundamental changes require majority of shares entitled to vote

137
Q

Dissenters’ or appraisal rights

A

Shareholder entitled to rights–shares purchased by corp at fair value–when SH doesn’t want to participate in an authorized merger, asset sale, share exchange, or article amendment.

138
Q

Invoking dissenters’ rights process

A

shareholder must
(1) send WRITTEN notice to the corporation prior to the vote of her intent to dissent
(2) abstain or vote “no” (dissent) at the meeting
(3) make prompt written demand for fair market value after the action has been approved

139
Q

Close corporation - definition

A

Corporation w few shareholders; usually not publicly traded w relaxed rules

140
Q

Close corporation voting

A

Can form voting agreements

141
Q

S Corporation – definition

A

Corporation with limited number of shareholders that is only taxed once–NOT at entity level

142
Q

Limited Liability Corporation – LLC definition

A
  • Limited liability of traditional corp + tax treatment of partnership
  • no lims on shareholders
  • no natural person requirement
  • owners = “members”
  • managed by all members
143
Q

LLC requirements for formation

A

(1) file articles of organization
(2) file an operating agreement w state

MEE DW (7 decks)

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