Corporations Flashcards
What is the nature of a corporation?
A corporation is a distinct legal entity from its owners the shareholders
What are four key characteristics of corporations?
- perpetual or continuous existence
- centralized management of assets and business through a board of directors
- limited liability for shareholders
- transferability of ownership interests / shares
What are advantages of corporate structure?
Corporations allow for significant amounts of capital to be raised
What are taxation disadvantages of corporate structure?
Double taxation on both corporate profits and shareholder dividents
How is a corporation structured?
There are three levels of control regarding a corporation:
1. Directors that sit on the board
2. Officers responsible for managerial duties
3. Shareholders who own the corporation
What is the role of directors within a corporation?
Directors sit on the board of directors and are responsible for governing the corporation
What is the role of officers within a corporation?
Officers serve as agents of the corporation and are responsible for managing the day-to-day matters of the corporation
What is the role of shareholders within a corporation?
Shareholders own the corporation and generally do not have control over management
What are promoters?
Promoters act on behalf and for the benefit of the unformed corporation, including by taking preliminary steps for creating the corporation, such as entering into contracts
Are promoters agents of the corporation?
No, promoters are not agents of the unformed corporation
Can promoters bind an unformed corporation?
No, because promoters aren’t agents of the unformed corporation, they don’t have the power to bind the corporation.
What is the nature of the relationship between promoters when an unformed corporation has multiple promoters?
There is a mutual agency relationship among the promoters similar to a partnership
Are promoters liable for the other promoter’s contracts in a multi-promoter context?
Yes, contracts entered into bind each promoter and the promoters are jointly and severally liable for all contracts
Are promoters generally personally liable on pre-incorporation contracts?
Yes, promoters are generally liable on pre-incorporation contracts entered into for the benefit of the unformed corporation
What are exceptions regarding promoter’s liability on pre-incorporation contracts?
Promoters will be liable on pre-incorporation contracts entered into for the benefit of the unformed corporation when:
1. the contract specifically disclaims the personal liability of the promoter
- circumstances demonstrate that the other party agreed to look only to the corporation for performance
Is corporation generally liable on contracts formed pre-formation?
No, a corporation will not be liable post-formation for a contract formed when the corporation was pre-formation
When will a corporation be held liable on pre-formation contracts?
A corporation may be held liable on pre-incorporation contracts if after formation the corporation assumes liability through adoption or novation
What is promoter’s liability if the corporation adopts a contract
If the corporation adopts a pre-incorporation contract after formation, the promoter remains liable on the contract but is entitled to indemnification from the corporation
What are the types of adoption that a post-formation corporation can make regarding contracts entered into pre-incorporation?
- Express adoption
- Implied adoption
What is express adoption by a post-formation corporation of a contract executed pre-formation
Express adoption occurs when the board of directors passes a resolution adopting the contract
How does implied adoption of a pre-incorporation contract by a post-formation corporation occur?
Implied adoption occurs when the corporation accepts or acknowledges the benefits of the contract
What is a promoter’s liability if there is a novation by the corporation of a pre-incorporation contract?
A novation releases the promoter from liability on the pre-incorporation contract.
When does a novation of a pre-incorporation contract occur?
A novation occurs when the three parties, the promoter, corporation and second party to the contract all agree to substitute the corporation in place of the promoter regarding liability and performance under the contract.
What is required for incorporation?
Incorporation may successfully occur upon execution and filing of the articles of incorporation
What is required for proper execution of the articles of incorporation such that a corporation can be successfully formed?
Proper execution requires the incorporate prepare and sign the articles of incorporation and include the following details:
1. name and address of each incorporator
2. address of initial registered office and name of initial registered agent
3. number of shares the corporation is authorized to issue
4. name of the corporation
Where must the articles of incorporation be filed for proper filing and incorporation?
Proper filing requires an incorporator to file the Articles at the secretary of state’s office along with the payment of the filing fee
How is a corporation’s date of incorporation determined?
The date of incorporation is the date of filing, unless the Articles delay the date of effectiveness
How long can Articles delay the date of effectiveness after filing?
Up to 90 days from the date of filing.
What is required for proper organization immediately after incorporation?
After incorporation a corporation must be properly organized at an organizational meeting called bye the incorporators or the initial directors named in the Articles
What is the penalty for failure to properly organize?
Failure to properly organize may expose shareholders to personal liability for corporation debts and obligations
What is required for complete organization of the corporation?
Completing the organization of a corporation requires:
1. naming or election of directors
2. appointing of officers
3. adopting bylaws
What are corporate bylaws
Bylaws are the internal rules governing a corporation’s actions and relations to shareholders, directors and officers
What types of provisions may be included in byalws?
Bylaws may include provisions pertaining to the regulation and management of the corporation.
What are limitations regarding the provisions that may be in the bylaws?
The bylaws may not contain provisions pertaining to regulation and management of the corporation that are inconsistent with the articles.
What are common provisions included in bylaws?
- time and place for annual shareholder’s meetings
- record date
- number of shares needed to constitute a quorum
- percentage of votes to authorize corporate action
- restrictions on transferability of corporate shares
What is a de facto corporation
A de facto corporation may be formed if statutory compliance has been insufficient for de jure status
What are the requirements for a de facto corporation to be formed?
If statutory compliance is insufficient for de jure status, a de facto corporation may still have been formed if:
1. a good faith, colorable attempt was made to comply with the statute
2. corporate principals act as if they’re a corporation
What is corporation by estoppel
Corporation by estoppel estops certain parties from denying corporate status to a corporation that doesn’t fulfill statutory requirements to be considered a de jure corporation
When may corporation by estoppel be asserted?
In a contract dispute between a third party and an unformed corporation believed to be properly formed a court may:
- estop a third party from alleging defective incorporation if that would unjustly expose the corporation’s principals to liability
- estop a corporation from arguing it isn’t liable due to defective incorporation if that would unjustly deprive the third party of relief
Can corporation by estoppel ever be invoked as a defense to a tort claim.
No
Do directors have the power to act individually?
No, the board of directors must act collectively and individual directors don’t have the power to act for the corporation.
May directors ever be given authority to act for the corporation?
While directors generally can’t act on behalf of the corporation unilaterally, they may be given the power to do so in the Articles of Incorporation or the corporate bylaws
What is a quorum?
A quorum is the minimum number of directors required for the Board action to occur
What is the general requirement for a quorum?
A majority of directors constitutes a quorum, unless otherwise provided in the Articles or bylaws
What affirmative vote is required for board action?
Board action occurs upon the affirmative vote of a majority of directors present at a meeting
When can a board act without calling a meeting?
A board may act without calling a meeting if every director gives signed, written consent, unless otherwise provided in the Articles or bylaws
What is notice requirement for regular Board Meetings
No notice is required for regularly scheduled board meetings, unless otherwise provided in the articles of incorporation
What notice is required for special board meetings
At least two days notice of the date, time and place of the special meeting is required, unless otherwise provided in the Articles or bylaws
When does the purpose of a special meeting need to be included with the notice of a special meeting?
While notice of the purpose of a special meeting is not generally required, it must be given for meetings at which the removal of a director is to be considered
Does notice of the purpose of a special meeting generally need to be provided?
No.
How may a director that is otherwise entitled to notice of a meeting waive their right to notice?
- in a signed writing
- by attending and participating in a meeting and not promptly objecting to the meeting
- voting and assenting to the action taken at the meeting
What is the nature of corporate officer’s relationship to a corporation?
Corporate officers are gents of a corporation
When can corporate officers enter into transactions on behalf of the corporation?
Corporate officers may enter into any transaction that is expressly or implicitly authorized
What is scope of officer’s implicit authority regarding entering contracts on behalf of the organization?
Officers have the implied authority to enter contracts that are reasonably related to performing their duties
What is the ultra vires doctrine
A corporation is not obligated to undertake a contract or activity beyond the scope of its powers
When may the limits of a corporation’s authority be challenged under the MBCA?
Under the MBCA, the limits of a corporation’s authority may be challenged in the following instances:
1. in a proceeding by a shareholder to enjoin a specific act
2. in a proceeding by the corporation either directly or derivatively against a current or former director, officer, employee or agent of the corporation
3. in a proceeding by the attorney general on the grounds that the corporation obtained its Articles by fraud or the corporation has continued to exceed or abuse its authority
What are fiduciary duties of directors and officers?
- duty of care
- duty of loyalty
What is the business judgment rule?
Rebuttable presumption against duty of care violation regarding directors and officers that’s applicable where directors an officers acted:
1. on an informed basis
2. in good faith
3. with an honest belief that the decision was in the corporation’s best interest
When are directors liable to corporation regarding breach in duty of care?
Directors are liable to the corporation for decisions or failures to act not undertaken in good faith
What is a director automatically not acting in good faith?
A director cannot act in good faith when committing or allowing the corporation to commit illegal acts, even when they’re profitable for the corporation
What are requirements regarding duty of care
Directors and officers must act
1. in good faith
2. with the care an ordinary prudent person in a like position would exercise under similar circumstances
3. in a manner reasonably believed to be in the best interest of the corporation
What types of information may directors and officers rely on when determining if a course of action is in the best interest of the corporation?
Directors and officers may rely on information, reports, recordings and financial data prepared by someone reliable and competent in the matter
What is required regarding duty of loyalty?
Directors, officers and employees must act loyal to the corporation an must not promote their own interests in a way that harms the corporation
When do conflicts of interest that implicate duty of loyalty typically occur?
Conflicts of interest typically occur when:
1. transacting business with the corporation (Self-dealing)
2. usurping a corporate opportunity
3. directly competing with the corporation
What is a conflict of interest transaction?
A transaction between director or officer and the corporation of which the director or officer had knowledge and a material financial interest
