Corporations Flashcards
Grounds to Pierce Corporate Viel
Look to totality of the circumstances, but consider the following always:
1. Alter Ego: failed to observe corporate formalities; C just SH’s alter Ego
2. Undercapitalization: failure to maintain sufficient funds to cover liabilities
3. Fraud: Parties engaged in fraud or fraud-like behavior
Requirements For Articles of Incorporation
Incorporator signs and files articles with state and pays fee
Required Contents
1. Name of Corp (including LLC, Corp, Limited, etc.)
2. Name and Address of local agent for service of process
3. name and addresses of incorporators; and
4. Number of authorized share in each class of stock
5. Duration of the Corporation (typically perpetual)
5. Purpose of the corporation
Veil Piercing General Rule
Shareholders are NOT personally liable for the debts of a corporation, but only liable for the amount invested into the corporation, except a court may “pierce the veil” of limited liability to avoid fraud or unfairness
More likely to pierce in TORT than in CONTRACT
Ultra Vires Doctrine
Corporate acts that are beyond what is permitted in the articles will be held unenforceable.
1. Shareholders may sue to enjoin ultra vires action
2. Corporation can take action against ultra vires D&O
3. State can intiate proceedings to enjoin
Today, typically avoided by stating purpose is to “engage in any lawful activity”
De Facto Corporations
A corporation that is not properly formed, but nevertheless enters into obligations after it was supposedly form will still be treated as a corporation with limited liability so long as the organizers
1. made a good faith effort to comply with incorporation process;
2. Have no knowledge of defect in the corporate status
Watered Stock
Stock sold for under par value; SH will be liable for the amount over par value (the “water”)
Common Stock v. Preferred Stock
Preferred Stock has preference over common-stock with respect to:
1. Dividends
2. Liquidation
Upon liquidation, secured creditor will generally take priority over even preferred shareholders
Four types of Stock Issuances
- Authorized Share: max shares that directors can sell. Set in articles of incorporation. Requires SH approval to share more
- Issued Shares: Number of shares from authorized pool that directors have actually sold
- Outstanding Shares: Shares that were once issued to shareholders and still remain in the possession of the shareholders. Not reacquired by corporation
- Treasury Shares: Stock previously issued to SH, but then reacquired by corporation
Two Methods of Distributions
- Dividend
- Stock buy back
When is a dividend not allowed and when will D&O be held liable for dividend
- Corporation is insolvent
- by issuing dividend, corporation would become insolvent
Directors who vote to authorize an unlawful dividend are personally liable J&S to the corporation for the amount in excess of the lawful amount UNLESS D&O relied in good faith on financial statements
Priority of Distribution of Dividend
- Preferred
- Preferred participating
- Cumulative
- Common
Closely Held Corporations
One with few shareholders that is not publicly traded. SH often serves as both directors and officers. Formalities are usually relaxed.
Closely Held Corporations: Restrictions on Sale of Securities
Reasonable restrictions on selling stock are allowed but not enforceable against a transferee unless the stock certificate includes a conspicuous statement or transferee has actual knowledge. Controlling SH has fiduciary duty when selling to outsiders (prevent looters/corporate raiding)
Rule 10b-5
A buyer or seller using interstate commerce may allege a violation against defendent who intentionally engaged in fraud or deception causing P harm
Section 16(b)
Insider Trading: Corporate insider can be forced to return short-swing profits to the corporation (six months between buying/selling or selling/buying)
Applicable ony to securities traded on national exchange OR corporations with assets more than $10 million dollars
Definition of Corporate Insider
Directors, officers, shareholders who hold more than 10% of any stock
MUST report changes in stock ownership to SEC
Shareholder Meetings
Must have one annual meeting to elect the board. Must have special meeting o approve fundamental change.
Unanimous consent of SH in writing to act w/o meeting is allowed (impracticable for large corporations)
Notice for Shareholder Meetings
Required no fewer than 10 days and no more than 60 days before the meeting
1. Content: Must include where and when
2. Special meeting: must include purpose
3. Failure to provide notice: allows SH to challenge actions
4. Waiver: SH will be held to waive defects in notice by a signed writing or by attending the meeting w/o objecting to defective notice
SH Voting: Record Date
Used to determine who may vote. Fixed by the directors and can be no more than 70 days before the meeting; ONLY SH who actually own shares on the record date may vote
SH Voting: Proxy
A 3rd party may be appointed to vote. To be effective, proxy must
1. be in writing
2. signed by shareholder as of record date
3. Be sent to the SEC of the corporation
4. State that it authorizes another to vote the shareholder’s shares; and
5. Cannot be valid for more than 11 months, unless otherwise stated
SH Voting: Quorom
To hold a vote requires a quorum of the eligible shares to be present at the meeting. A quorum is a majority of votes representing the eligible outstanding shares.
SH Voting: Necessary Vote
If quorum is present, shareholder vote is effective if the votes cast in favor of proposal exceed the votes cast against the proposal.
