Corporations Flashcards
shareholders
owners of corporation
board of directors
in charge of management of the corporation
officers
agents of the corporation appointed to carry out the corporations policy
who is liable for the corporations obligations?
only the corporation itself can be held liable for corporate obligations
is ownership of a corporation freely transferable
yes
Taxation of a C Corporation
1) profits taxed as an entity distinct from its
owner and
2) Shareholders pay income taxes on distributions
taxation of an S corporation
May elect to be taxed as a partnership…
SO, not subject to double taxation.
1) profits NOT taxed as an entity distinct from its owner and
2) Shareholders pay income taxes on distributions
Restrictions on S corporations
stock can be held by no more than 100 persons, generally shareholders must be individuals, and
there can be only one class of stock
de jure corporation
formed in accordance with law
de facto
not all corporate laws have been followed but corporation is recognized through estoppel
How to create a de jure corporation
paper– articles of incorporation
person– the incorporator
act– corporate existence begins on filing
what must articles of incorporation contain
- name of the corp.
- name and address of each incorporator
- registered agent and street address of the registered office
Ultra Vires Acts
Activities beyond the scope of
the stated business purposes
common law approach to Ultra Vires Acts
void and unenforceable
MBCA approach to Ultra Vires Acts
generally enforceable, but can only be raised in three situations
— A shareholder may sue the corporation to enjoin a proposed ultra vires act;
— The corporation may sue an officer or director for damages for approving an ultra vires act; and
— The state may bring an action to dissolve a corporation for committing an ultra vires act.
what happens at the organizational meeting
purpose of the meeting is to “complete the organization of the corporation,” which means (1) adopt initial bylaws and (2) appoint officers.
what are bylaws
internal documents; operating manual
when the articles of incorporation and the bylaws conflict, what governs?
articles
B Corp
formed for profit and also to pursue some benefit to a broader social policy cause.
Decision makers must consider the impact of decisions not only on shareholders, but also on the broader community or environment.
If the corporation incurs a debt, commits a tort, or breaches a contract, are the shareholders personally liable for that debt?
no
Requirements for Defacto Corporation
- There must be a relevant incorporation statute
he parties made a good faith, color able attempt to comply - with the statute, meaning the parties tried and came close to forming a corporation; and
- There has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation.
Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are ost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders personally liable on the contract?
yes, unless court finds a defacto corporation
corporaiton by estoppel
persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence
corporation by estoppel appilies in what kinds of cases?
contract cases (not tort)
promoter
a person acting on behalf of a corporation not yet
formed. promoters are joint ventures (partners) who have a fiduciary relationship with each other.
promoters duty to corporation
fiduciary duty to the corporation is one of fair disclosure and good faith
liability for pre-incorporation contracts
Since the corporate entity does not exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name prior to incorporation. The corporation may become liable only if it expressly or impliedly adopts the promoter’s contract.
Promoter Liability
if a promoter enters into an agreement
with a third party on behalf of a planned but unformed corporation, the promoter is personally liable on the contract. The promoter’s liability continues after the corporation is formed, even if the corporation adopts the contract and benefits from it.
promoter right to reinbursement
A promoter who is held personally liable on a preincorporation contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corpo-
ration.
forign corporations transacting business in a state must
register with the secretary of state and pay fees
debt securities
- consists of a bond (promise to repay the loan with interest)
- the holder of debt securities is a creditor, but not an owner, of the corporation
equity securities
- stock
-stockholder is an owner, but not a creditor, of the corporation
shares described in the corporation’s articles of
incorporation
authorized shares
Shares that have been reacquired
by the corporation through repurchase or redemption are
authorized but un-issued, sometimes called treasury shares
common shares
corporation chooses to issue only one type of share, giving each shareholder an equal ownership right
issuance
when a corporation sells its own stock.
subscriptions
written offers to buy stock from a corporation.
pre-incorporation subscriptions are __________ unless otherwise provided in the terms of the subscription agreement or unless all subscribers consent to revocation
irrevocable for six months
Postincorporation subscriptions are
revocable until accepted by the corporation
consideration
any tangible or intangible property or benefit to the corporation
includes money, property, services already
performed, discharge of a debt, promissory notes, and future services
Can X Corp. give employees options to buy stock as payment for services?
yes
Par
minimum issuance price.
C Corp. is issuing 10,000 shares of $3 par stock. What is the minimum amount it must receive for these shares?
30K
no par =
no minimum issuance price
watered stock
when par value stock is issued for less than its par value
who is liable when watered stock is sold
the directors if they knowingly authorized the sale
the person who bought the stock
If sold to a third person, third party not liable if acted in good faith
MBCA Approach to par
MBCA generally has eliminated the concept of par and allows corporations to issue shares for whatever consideration the directors deem appropriate.
preemptive right
the right of an existing shareholder of common
stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money
Under MCBA must preemptive rights be included in the articles
yes
shareholders generally have no preemptive right in shares issued:
(1) for consideration other than cash
(2) within six months after incorporation, or
(3) without voting rights but having a distribution preference.
qualifications for directors
human beings with legal capacity
need not be shareholders unless bylaws or articles say so
Who elects the director?
elected by incorporators at organizational meeting OR by shareholders at each annual meeting
Share holds may remove directors
with or without cause
board of directors must
act as a group
can individual directors speak for or bind the corporation?
no
directors may act in the following ways:
- Unanimous agreement in writing or
- At a meeting, which must satisfy the quorum and voting requirements discussed below.
is notice required for regular meetings
no
what kind of notice is required for special meetings?
at least two days’ written notice of date,
time, and place is required. The notice need not state the purpose of the meeting.
failure to give notice of a special meeting
whatever happened at the meeting is voidable—maybe even void—unless the directors who were not notified waive the notice defect.
how can directors waive the defect in notice for a special meeting?
(1) in writing any time, or (2) by attending the meeting without objecting at the outset of the meeting.
can directors give proxies or enter voting agreements for how they will vote as directors?
no
quorum
majority of all directors. required for any board meeting
approval of action
quorum must be present
takes a majority vote of those present to approve an action
broken quorum
people leave and quorum is no longer present
any action required to be taken by the directors at
a formal meeting may be taken by
unanimous consent, in writing, without a meeting.
a director does not have the power to bind the corporation in contract unless there is actual authority to act. Actual authority generally can arise only if:
1) proper notice was given for a directors’ meeting, a quorum was present, and a majority of the directors approved the action, or
(2) there was unanimous written consent of the directors.
what does the board of directors do?
sets policy, supervises officers, declares distributions, determines when stock will be
issued, recommends fundamental corporation changes to shareholders, creates committees
What actions can a committee NOT take
- Declare a distribution
- Fill a board vacancy
- Recommend a fundamental change to shareholders
Standard for a directors fiduciary duty owed to the corporation
A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a person in like position
would reasonably believe appropriate under the circumstances.
who has the burden of proving a breach of the duty of care?
the challenger/plaintiff
nonfeasance
occurs when a director basically does nothing. In
other words, we have a lazy director.
misfeasance
occurs when the board makes a decision that
hurts the business.
business judegemt rule
directors who meet the standard will not be liable
for corporate decisions that in hindsight turn out to be poor or erroneous
the court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis.
In discharging her duties, a director is entitled to rely on information, opinions, reports, or statements, if prepared or presented by:
- corporate officers or employees
- legal counsel, accountants, or other persons
- a committee
who has the burden of proving a breach of a duty of loyalty
burden on the defendant
A conflicting interest transaction will not be enjoined, set aside, or give rise to an award of damages because of the director’s interest if
- It was approved by a majority (but at least two) of the disinterested directors
- It was approved by a majority of votes entitled to be cast by disinterested shareholders
- judged by the circumstances at the time the corporation entered into the transaction, it was fair to the corporation.
Special Quorum Requirements for voting on a conflicting transaction
at a directors’ meeting, a quorum is a majority (at least two) of disinterested directors.
a conflicting transaction if approved may also require a showing of
fairness
possible remedies for improper conflicts of interest
- enjoin the transaction
- set the transaction aside
- damages
who sets director pay
the directors … but if pay too high they breach the duty of loyalty
usurpation of a corporate opportunity
when a director wrongly diverts a business opportunity from their corporation to themselves
without first giving their corporation an opportunity to act.
- corporation must have had an interest or expectancy
- lack of corps. financial ability not a defense
- board decides whether to take or reject an opportunity
remedy for usurpation
the corporation can sue to recover under a constructive trust theory.
- director can be compelled to transfer property to the corporation at the price she paid.
- or the corporation may recover any profit
duty to disclose
The directors also have a duty to disclose material corporate information to other members of the board
can a corp make a loan to a director?
A corporation can make a loan to a director if it is reasonably expected to benefit the corporation.
A director may be liable to the corp for
improper distributions, improper loans, “ultra vires” acts, and breaches of fiduciary duties.
A director is presumed to concur with board action unless
her dissent or abstention is noted in writing in the corporate records. an oral dissent alone is not effective
when is a director not liable for a boards actions?
A director is not liable under the rule above if she was absent from the board meeting
an officer is a ____ of the corporation
agent
two traditional roles required in a corporation
president and secretary
how are an officers duties determined
by the bylaws or the board
the board can remove an officer
with or without cause, but can be liable for breach of employment contract
can shareholders hire and fire officers?
no
no indemnification
A corporation cannot indemnify a director who is (1) held liable to the corporation or (2) held to have received an improper benefit.
mandatory indemnificaiton
Unless limited by the articles, a corporation must indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding. In some states, the director or officer must win the entire case; in others, they are entitled to indemnification “to the extent” that they win the case.
permissive indemnification
A corporation may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought
against the director on account of the director’s position if the director:
(1) acted in good faith; and
(2) believed that her conduct was in the best interests of the corporation (
who determines whether to indemnify
a disinterested majority of the board, or if there is not a disinterested quorum, by a majority of a disinterested committee or by independent legal counsel.
The shareholders may also make
the determination
may officers be indemnified?
Officers generally may be indemnified to the same extent as a director.
can a court order indemnification?
yes
the articles of incorporation can eliminate director liability to the corporation for damages for breach of what duty?
duty of care cases only
the articles cannot eliminate director liability for…
intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit. (duty of loyalty issues)
when can shareholders run the corporation directly?
in a close corporation
special fiduciary dutys in close corporations
cuties of controlling shareholders cannot use their power to benefit at the expense of minority shareholders
oppression of minority shareholders in a close corporation?
If there is oppression of minority shareholders, they can sue the controlling shareholders who oppress them for breach of this fiduciary duty.
professional corporations
- Licensed professionals may incorporate as a professional corporation or association.
- articles state the purpose is to practice a particular profession
- Directors, officers, and shareholders usually must be licensed professionals.
liability in a professional corporation
The professionals are personally liable for their malpractice. However, shareholders are generally not liable for corporate obligations or for other professionals’ malpractice.
When can a court pierce the corporate veil and hold a shareholder personally liable?
- The shareholders must have abused the privilege of incorporating; and
- Fairness must require holding them liable.
So courts may pierce the corporate veil to avoid fraud or unfairness by shareholders in a close corporation. But something like sloppy
administration is not enough.
Common scenarios justifying the piercing of the corporate veil
alter ego (identity of interests)
undercapitalization
fraud, avoidance of existing obligations, or evasion of statutory provisions
alter ego (identity of interests)
shareholders ignore corporate formalities such that the corporation may be considered the “alter ego” or a “mere instrumentality”
where shareholders treat corporate assets as their own, commingle their money with corporate money, and so on.
undercapitalization
corporation is inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities.
fraud, avoidance of existing obligations, or evasion of statutory provisions
to prevent fraud or to prevent an individual shareholder from using the entity to avoid
his existing personal obligations.
when the corporate veil is pierced who is liable
only shareholders who are active in the operation of the business will be personally liable.
The court might pierce the corporate veil and hold
the parent corporation liable just as it could if the shareholder were a human.
corporate veil is most often pierced in what kind of cases
tort
who may pierce?
creditors may be allowed to pierce the corporate veil. Courts almost never pierce the veil at the request of a shareholder.
Direct Actions
A direct action may be brought for a breach of a fiduciary duty owed to the shareholder by an officer or director. Shareholder sues on her own behalf
Derivative Suit
if a shareholder believes the corporation has been wronged but the directors have not done anything to enforce its rights with respect to the wrong, the shareholder may be able to bring a shareholder derivative suit to enforce the corporation’s rights.
corporation joined as a defendant
coproration gets any damages awarded
can a shareholder-plaintiff recover costs and attorneys fees after bringing a derivative suit?
The shareholder-plaintiff may recover costs and attorneys’ fees usually from the judgment won for the corporation
If the shareholder-plaintiff loses the derivative suit, she cannot recover costs and attorneys’ fees
standing requirements for a derivative suit
- stock ownership at time of wrong
- adequate representation of the corporations interest
Demand requirements for a derivative suit
1 Under the MBCA, the shareholder must make a written demand on the corporation
2 the shareholder cannot sue until 90 days after making this demand, unless:
A) the shareholder has earlier been notified that the corporation has rejected the demand; or B) irreparable injury to the corporation would result from waiting
In some states demand not required if effort would be fuitile
the parties can settle or dismiss a derivitve suit only
with court approval
dismissal of a derivative suit may be based on
independent investigation saying suit is not in corps best interest and court finds
1) those recommending dismissal were truly independent and
2) they made a reasonable investigation
burden of proof to avoid dismissal in a derivative suit is on
the plaintiff-shareholder
authorized stock v issue stock v outstanding stock
authorized = number of share corp may issue
issue = number of shares corp has sold
outstanding stock = shares company has issued and not required
each outstanding share is entitled to ___ vote
one
C Corp. sets its annual meeting for July 7 and sets the record date as June 8. S sells B her C Corp. stock on June 25. Who is entitled to vote the shares at the meeting, S or B?
S because S owned on the record date
record date
date set by board of directors
record date determines who may vote at meeting
record date must be no more than 70 days before the meeting
treasury stock exception
Suppose the corporation reacquires stock before the record date, so the corporation is the owner of this treasury stock as of the record date. No one votes the stock, because it was outstanding on the
record date.
S owns stock in C Corp. S is the record shareholder. After the record date, S dies. Can S’s executor vote the shares?
yes
when may a shareholder vote her shares by proxy?
- in writing
- signed by record shareholder
- directed to the secretary of the corp
- authorizing another to vote the shares
is a proxy revocable?
yes. may be revoked by
1 attending a meeting to vote themselves,
2 written notification to the secretary, or
3 by subsequent appointment of another proxy
A proxy is irrevocable only if
coupled with an interest or given as security.
This requires (1) the proxy says it’s irrevocable and (2) the proxy holder has some interest in the shares other than voting.
Voting Trust
written agreement of shareholders under which all
of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement.
voting trusts are valid for not more than ___ years
10 years, unless extended by agreement of the parties
voting agreement
shareholders can enter into voting agreements providing for how they’ll vote their shares. The requirements are that the agreement be in writing and signed
two kind of shareholder meetings
annual and special
annual meetings
Corporations must hold annual shareholders’ meetings.
If the annual meeting is not held within the earlier of six months after the end of the corporation’s fiscal year or 15 months after its last annual meeting, a shareholder can petition the court to order one to be held.
special meetings
Special meetings may be called by (1) the board of directors, (2) the president, (3) the holders of at least 10 percent of the outstanding shares, or (4) anyone else authorized to do so in the articles or
bylaws.
Ten percent of the outstanding shares want to call a special shareholder meeting to remove an officer. Is that OK?
no. Shareholders do not remove officers
Notice Requirements for meetings
- notified not fewer than 10 or more than 60 days before the meeting
- in writing
- to every share hold entitled to vote
notice can be waived
in a signed writing or by attendance
required content of a notice
date, time and place of meeting
for special meeting, must also include the purpose of the meeting
failure to give proper notice to all shareholders =
whatever action was taken at the meeting is voidable (maybe void), unless those who were
not sent notice waive the notice defect.
Quorum for a shareholder meeting
a quorum is a majority of outstanding shares
entitled to vote, unless the articles or bylaws require a greater number
focus on shares represented not number of shareholders
if a quorum is present how many votes are required to take action
generally a simple majority of those who actually vote
votes required to elect a directer
Plurality (meaning, the person who gets
more votes for the seat on the board than anyone else is elected).
votes required to approve a fundamental corporate change
majority of the shares entitled to vote
votes required to remove a director
majority of the shares entitled to vote.
X Corp. has 12,000 shares outstanding. They have a meeting to decide whether to amend the bylaws. Say 8,000 shares are represented at the meeting (so we have a quorum), but only 6,000 shares actually vote on the proposal. How many shares must vote yes for this to pass?
3001
cumulative voting
one at-large election. The top two (or however many) finishers are elected to the board.
typically used in C-corporations
straight voting
separate election for each seat on the board being elected. Each outstanding share gets one vote for each seat. The candidate who gets more votes than another is elected to that seat.
T or F: Whenever an amendment to the articles of incorporation will affect only a particular class of stock, that class has a right to vote on the
action even if the class otherwise does not have voting rights.
True
When are restrictions on transfer or stock okay?
Restrictions are valid if they are not an undue restraint on alienation.
Are “right of first refusal” (“RFR”) restrictions enforceable?
yes
f the restriction is valid, can it be enforced against the transferee, a third-party purchaser?
yes, if
1. the restriction is conspicuously noted on the stock certificate OR
2) the transferee had actual knowledge of the restriction at the time of the purchase
True or False: A shareholder has the right, personally or by an agent, to inspect
(and copy) the books and records of the corporation.
true
Unqualified Right = Any shareholder may inspect the following records regardless of purpose:
(1) the corporation’s articles and bylaws,
(2) board resolutions regarding classification of shares,
(3) minutes of shareholders’ meetings from the past three years,
(4) communications sent by the corporation to shareholders over the past three years,
(5) a list of the names and business addresses of the corporation’s current directors and officers, and
(6) a copy of the corporation’s most recent annual
report.
How does a shareholder request access to unqualified right documents?
The shareholder must make a written demand at least five business days in advance.
To what documents does a share holder have a qualified right to?
1) excerpts of the minutes of board meetings,
(2) the corporation’s books, papers, and accounting records, and
(3) shareholder records
how does a shareholder make a demand for qualified right documents
The shareholder must state a proper purpose for the demand. The shareholder also must
provide five business days’ advance written notice.
True or false: he shareholder need not personally conduct the inspection; they may send an attorney, accountant, or other agent.
true
If the corporation fails to allow proper inspection
the shareholder can seek a court order
Types of Distributions
dividends, redemptions of shares, repurchases of shares, distribution of assets upon liquidation
True or False: At least one class of stock must have a right to receive the corporation’s net assets on dissolution. Beyond this rule, distributions generally are discretionary.
the decision whether to declare distributions generally
solely within the directors’ discretion,
subject to solvency limitations and any provisions to the contrary in a shareholders’ agreement or the articles.
True or False: shareholders may compel a distribution?
False. shareholders have no general right to compel a distribution. But a shareholder may sue to compel a distribution if they can make a very strong showing of abuse of discretion
Which Shareholders Get Dividends?
The record shareholder of the stock as of the record date will receive the dividend.
A corporation cannot make a distribution when
it’s insolvent or if the distribution would render it insolvent.
a distribution is not permitted if, after giving it
effect, either
The corporation would not be able to pay its debts as they become due OR The corporation’s total assets would be less than the sum of
its total liabilities
Directors are ______ for improper distributions
jointly and severally liable
when are share holders liable for improper distributions?
Shareholders are personally liable only if they knew the distribution was improper when they received it.
types of fundamental corporate change
- Amending the articles
- Merging or consolidating into another company
- Transferring substantially all assets (or having stock acquired in a “share exchange”)
- Converting to another form of business
- Dissolving
What is needed to make a fundamental corporate change?
1) board action adopting a resolution of fundamental change;
(2) the board submits the proposal to the shareholders with written notice;
and
(3) shareholder approval.
for fundamental change, what shareholder vote is required for approval?
a majority of the shares entitled to vote
right of Appraisal
dissenting shareholder right of appraisal is the
right of a shareholder to force the corporation to buy their stock for fair value.
fundamental changes triggering right of apprasial
- Merging or consolidating
- Transferring substantially all assets
- Stock being acquired in a share exchange
- Converting to another form of business
right of apprasial only exists in what kind of corporation?
close corporation
Merger
involves the blending of one or more corporations into another corporation, and the latter corporation survives while he merging corporations cease to exist following the merger
consolidation
involves two corporations combining to form a new entity
requirements for consolidation and merger
- board of director action (by both corporations)
- notice to shareholders and shareholder approval by both corporations
- surviving corporation must deliver articles
of merger or consolidation to the secretary of state.
when is shareholder approval of a merger for a surviving corporation not required
successor liability
The surviving corporation succeeds to all rights and liabilities of the constituents So a creditor of that corporation can sue the survivor.
conversion
changing from one business form to another (general partnership to LLC)
requires board approval, notice to shareholders, shareholder approval, and filling with secretary of state
Voluntary dissolution by incorporators or initial directors
If shares have not yet been issued or business commenced, a majority of the incorporators or initial directors may dissolve the corporation by delivering articles of dissolution to the
state.
All corporate debts must be paid before dissolution, and if shares have been issued, any assets remaining after winding up must
be distributed to the shareholders
Dissolution by corporate act
dissolve under fundamental change procedure.
Effect of dissolution
A corporation that has been dissolved continues its corporate existence but is not allowed to carry on any business except as appropriate to wind up and liquidate its affairs.
can calims be brought against the corp after dissolution?
yes
a corporation can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not
less than 120 days in which to file their claim.
The time for filing unknown claims can be limited to three years by publishing notice of the dissolution in a newspaper in the county where the corporation’s known place of business is located.
Dissolution by attorney general
may seek judicial dissolution of a corporation
on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority.
Shareholders may petition for involuntary dissolution on any of the following grounds:
- Director abuse, waste or assets, or misconduct
- directors are deadlocked causing irreparable injury to the corporation
- failure to elect one or more directors for a period that includes at least two consecutive annual meeting dates
- The corporation has abandoned its business and failed to dissolve within a reasonable time.
As an alternative to ordering involuntary dissolution, a court might order
a buy-out of the objecting shareholder
especially likely in a close corporation.
Creditors may seek judicial dissolution if:
1) the creditor’s claim has been reduced to judgment, execution of the judgment has been
returned unsatisfied, and the corporation is insolvent; or
(2) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent
administrative dissolution
state may bring an action to administratively dissolve a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state.
The following steps must be taken to wind up the corporation:
- Give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its principal place of business;
- Gather all assets;
- Convert assets to cash;
- Pay creditors; and
- Distribute any remaining sums to shareholders, pro rata by share, unless there is a liquidation preference.
