Corporations Flashcards
Corporation Characteristics
- Centralized Mngmt – BOD delegates day to day mngmt to officicers
- Limited –only corp is subject to L
- Transferability of ownership – SHs can freely transfer their ownership interests (ie shares), unless prohibited by AIC or bylaws
- Continuity -changes in ownership do not affect the corp’s existence
- Personhood –corps considered ppl re: constitutional protections
Articles of Incorporation
Formation: when AIC filed with SOS
AIC must include:
1. Name – corp name (LLP, co, inc)
2. Shares – max # of authorized shares
3. Incorporator – name & address
4. Registered Agent – name & address
*some states require statement of purpose; most use boilerplate language
Bylaws
written rules for managing the corp–– provides for ordinary business conduct
EX:
- election of BOD
- meeting times
If bylaws conflict with AIC –> AIC trumps
Promoter
acts on behalf of a corp before incorporation to get capital commitments; usually by forming Ks with parties interested in becoming SHs
Promoter L
personally L for Ks entered into on behalf of the corp –> remains L after formation
Exception: Novation & indemnification
Novation
agreement btw parties releasing promoter & substituting corp
Indemnification
promoter may be indemnified by the corp if he is held L on the K after formation
Pre-Incorporation: Corp’s L
GR: no L based on pre-incorp K entered into by promoters
Exception: adoption of the K
Subscription Agreement
Agreement where one agrees to buy specified # of shares from a corp at a given notice
Ultra Vires Acts
Consequence for when a corp acts outside of its stated purpose (as stated in AIC)
Three Possible Consequences:
1. SH Suit – to enjoin the UVA
2. Corp Suit –sue for damages
3. State Action – action to dissolve corp
De Facto Corp
Defective corp that may still be treated as properly formed corp
- Good Faith Effort ––Owner must make a good-faith effort to comply with the incorporation requirements;
- Operate w/o Knowledge––owner operates the business as a corp w/o knowing that these reqs have not been met.
Result: owner, as de facto SH, is shielded from personal L for obligations incurred in the purported corporation’s name.
NOTE: RMBCA has abolished this doctrine
Corp by Estoppel
Person who deals with an entity as if it were a corp is estopped/barred from denying its existence and is thereby prevented from seeking the personal L of the business owner.
Limited to L agreements.
Piercing the Corp Veil
GR: SHs, Directors, Officers not L for corp obligations
PCV: once pierced, all persons composing the corp may be personally L––but usually just those in active mngmt
Why Pierce?
1. ignoring corp formalities
2. Undercapitalization
3. Fraud or illegality
PCV: Ignoring Corp Formalities
Where a SH dominates the corp to the extent that the corp is not being treated as a separate entity
corp is used as an “alter ego” or a “mere instrumentality” to the SH
PCV: Undercapitaliztion
Corp was undercapitalized/underfunded at time of incorporation
TIP: look for insolvency right after formation–> prime indicator of this factor!
PCV: Fraud or Illegality
- Corp may be disregarded if there is fraud;
- to prevent fraud or other illegality; or
- to prevent SH from using corp to avoid existing personal L
Debt Securities
aka BONDS
corp borrows funds from an outside creditor and promises to repay creditor
Holders of bonds have no ownership interest
Equity Securities
aka STOCKS
instrument that represents investment in the corp––holders become part owners of the corp
Types of stocks:
1. Authorized
2. Issued
3. Outstanding
4. Reacquired/Buy back
Authorized Shares
max # of shares a corp may issue
this is # authorized in AIC
Outstanding Stock
Shares issued & in possession by SH
Outstanding shares is what is voted on!!
Outstanding = (issued - treasury)
Most important one
Reacquired Shares
those that the corp buys back
aka treasury shares
Issued Shares
Number of shares issued from the authorized pool that the directors have actually sold
Classes of Shares
corps can have diff classes of stock shares; each class can have diff rights (voting, economic)
AIC must authorize:
1. # of shares of each class
2. Name/distinguishing designation of each class
3. Rights/preferences/ limitations per class
Distribution of Rights
corp can distribute assets via:
- dividends
- redemption of shares
- liquidating distributions upon dissolution
Who can demand distribution of assets?
ONLY BOD
SH have no right to demand this
Consideration for Shares
shares can be issued by the corp in exchange for any property or benefit to the corp
Preemptive Right
Right to acquire stock to maintain the % of the ownership any time new shares are issued
GR: no preemptive right for SHs, unless in AIC or negotiated
SH’s Power
SHs can exert control over the corp via power to:
- elect/remove directors
- amend bylaws
- approve fundamental changes (merges, sale of assets, dissolution)
SH Rights to Records
Right to inspect books/records for any purpose upon written notice
Proper Purpose – reasonably related to interest as SH
Notice – 5 days written notice
What can a SH always inspect w/o proper notice
SH can always inspect these w/o proper notice:
1. AIC
2. Bylaws
3. Annual reports
4. Meeting minutes
5. BOD resultions re share classification
5. Corp comm to SH
SH Meeting
2 types: annual & spcial
Annual –> corp must hold annual meetings for election of directors & other special matters
Special Meeting –> called to conduct business that requires SH approval
***MUST HAVE NOTICE
SH – Notice of Special Meeting
Notice REQ:
1. Must be given between < 10, but 60 >, days before meeting date
2. time
3. date
4. location
5. Purpose of meeting
SH may waive notice either in writing or by attending the meeting.
SH Voting Requirements
Unless AIC says otherwise, each outstanding share is entitled to 1 vote
REQ:
1. Quorum must be present (maj of outstanding shares_
2. Vote effective if:
- votes in favor
- exceed
- votes against
SH Voting – Proxies
SH can use proxies to vote
Writing needed
Types of SH Suits
- Direct Suit
- Derivative Suit
Direct Suit
SH suing in the SH’s own name for damages –> damages go directly to SH
SH Approval – Quorum
For vote to be effective
- Quorum of corp’s shares (NOT SHs)
- Represented at meeting (in person or proxy)
Quorum Def
majority of the corp’s outstanding shares represented at the start of the meeting
Derivative Suit
SH suing on behalf of the corp–alleged harm harms the corp as a whole
- Standing –– must have been a SH at time of the harm
- Recovery –– goes to corp; but SH can recover atty fees
- Written Demand Requried
- SH must make a written demand on the corp –> wait 90 days before filing suit; unless:
(a) corp rejected demand; or
(b) irreparable injury to corp will happen if wait 90 days
When do derivative suits often arise
on essays when wrong committed by an officer or director –> asks to ID whether a breach has occurred & what SH remedies available
BOD Characteristics
Responsible for corp affairs & mngmt
of Ds ––at least one required; bylaws or AIC can dictate a #
Election –– SH elect Ds at annual meeting
Removal ––can remove w/ or w/o cause by SHs, unless AIC provide otherwise
—–> EXCEPTION: Staggerd Board
BOD Meeting
Types: regular & special
Notice –– no notice needed for regular meetings; 2-day notice needed for special meeting
Quorum –– majority of Ds, unless AIC says otherwise
Action w/o Meeting –– can happen only if all Ds give written consent describing action taken
Staggered Board
Class of Ds elected at diff times
BOD – Delegating Authority
BOD delegates mgmt to officers & executives
Committes –– BOD can create committees; have <1 one D w/ power to oversee corp affairs
Committee cannot make major corp decision that needs all BOD consent
BOD entitled to rely on expertise of the committee, or other officers/experts/employees
BOD – Duties
Duty of Care
Duty of Loyalty
BOD – Duty of Care
Fiduciary duty
Standard ––D must act w/ care that a person in a like position would reasonable believe appropriate under similar circumstances
Courts apply the Business Judgment Rule to determine if duty of care breached
BJR
Business Judgment Rule –> Officers/ BOD
Ds protected from legal L if decision was made:
1. in good faith
2. w/ care of RPP in like position would
3. in manner director/officer reasonably believed to be in the best interest of the corp
If breached duty –> can be personally L for damages
–Note: AIC can limit personal L
BOD – Duty of Loyalty
GR: cannot receive a benefit to the detriment of the corp w/o effective disclosure & ratification
Includes:
- self dealing
- usurping or stealing corp opp
Duty of Loyalty – insulation from L
A self-interested transaction may be upheld if it is (1) disclosed and (2) ratified by:
(a) maj of interested directors; or
(b) maj of disinterested SH
Duty of Loyalty – COI
when an officer/director has a personal interest in a transaction and knows that a he or a family member is:
- party to transaction
- has beneficial interest or closely linked to transaction –> can influence how direcotr/officer votes
- affiliated w/ another entity to the transactions
Merger
2+ corps blend into a new corp; or when a corp absorbs other corps
REQ FOR APPROVAL:
1. BOD vote ––either maj, or whatever AIC stips
2. SH vote ––majoirty
Short Form Merger
parent corp owns < 90% stock of subsidiary –> subsidiary can be merged into parent corp w/o approval of SH
Mergers – Dissenter’s rights
dissenting SH can challenge merger or demand payment for their shares at FMV
Mutual Notice REQUIRED –before vote is taken:
1. corp must give notice to SH –>
2. SH must give notice of intent to demand payment
Dissolution
Termination of corp’s existence
Effect: corp continues to exist while it winds up and liquidates its affairs ––but no other business allowed to continue
Types:
1. Voluntary Dissolution
2. Administrative Dissolution
3. Judicial Dissolution
Voluntary Dissolution
considered a fundamental change
REQ:
1. BOD approval
2. SH approval
Administrative Dissolution
action brought by state to dissolve corp
usually due to failure to adhere to statutory requirements or formalities
Judicial Dissolution
Action by AG or SHs
Attorny General – can act to dissolve corp on the ground that it abused its authority, committed fraud
SH –– can seek judicial dissolution where:
1. BOD deadlocks or SH threaten irreparable harm
2. corp abandoned business and failed to dissolve
3. corp assets are wasted for non corp use
Disposition of Property
where corp sells, leases, otherwise disposes of all or substantially all property outside the reg court of business
Fundamental change –> BOD & SH approval needed
LLC
Taxed like a PS
Limited L like a corp
Owners considered memebrs/managers
LLC Formation
certification of formation filed with state
REQ:
1. name of LLC
2. address of registered office
3. Name/address of registered agent
LLC Operating K
similar to bylaws; govern doc
LLC Management
presumption all members manage,
but can also have several managers and members
LLC voting
members/managers may have equal voting rights; or
vote in proportion to ownership depending on operating K
LLC Distribuiton Rights
like a corp
Operating K dictates how LLC will be managed, and how profits will be distributed
LLC Duties
Depends if member or manager managed
member mnged –> all members owe DoC & DoL
Manager mnged –> only managers owe DoC & DoL
LLC Good Faith & Fair Dealing
all members and managers have an obligation of good faith & fair dealing
Good faith fair dealing def
Good faith and fair dealing are legal principles that govern contractual relationships and require the parties to act honestly, fairly, and in a manner that upholds the reasonable expectations of the parties.
Record Date
Holder of the outstanding shares as of the record date (as set by BOD) is entitled to vote
