corporations Flashcards
beginning of corporation’s existence
a corporation comes into existence on the day the articles are filed unless a delayed effective date is specified
Articles of Incorporation (formal requirements)
Must contain:
corporate name
number of shares the corporation is authorized to isssue
address of initial registered office
name of registered agent at that office
name and address of each incorporator
Bylaws vs Articles
articles control in the event of any conflicts
amending bylaws
shareholders can do it
board of directors can unless
aoi forbid it; or
shareholders expressly provide that the board of directors can’t amend/repeal specific law
foreign corporation
a corporation incorporated in another jd
governing law
state of incorporation governs
internal affairs
interest holder liability of shareholders
LLC formation
articles of organization are filed with secretary of state; and
the company has at least one member
LLC operating agreement
governs
relations between members and llc
rights and duties of managers
activities and affairs of the company
means and condition for amending the operating agreement
promoter
a promoter is someone who acts on behalf of a corporation that has not yet formed
Promoter/preformation liability
A person is personally liable for any liabilities arising from their conduct when (1): he purports to act on behalf of a corporation and (2) actually knows that no corporation has formed absent (1): novation or (2): express contractual provisions stating that any liabilities created are those of the corporation and not the promoter.
Liability of a corporation for pre-incorporation contracts
Generally, a corporation is not liable for pre-incorporation contracts unless they are expressly or impliedly adopted.
Such a contract is impliedly adopted if (1): the corporation has reason to know of the contract’s material terms; and (2): accepts some benefit of the contract.
defective incorporation and owner liability
Under the RMBCA, promoters are not liable for pre-incorporation contracts unless they purported to be acting on behalf of a corporation and actually knew the corporation had not been formed.
De facto Corporation Doctrine
Limited liability protection will be afforded despite a defective filing if
(1): a good faith effort at incorporation was made;
(2): the company is otherwise eligible to incorporate; and
(3): some action was taken indicating that the entity considered itself a corporation.
incorporation by estoppel
any person that treated a business as though it were a corporation is estopped from denying its corporation status
dealing solely with the purported corporation and not relying on assets of individual promoters.
piercing the veil
Generally, shareholders, directors and officers are not personally liable for the liabilities of a corporation.
Veil can be pierced such that personal liability will be imposed if the corporation is acting as the alter ego of an individual such that there is little separation between the shareholder and the corporation such as when the corporate form is being used for personal reasons.
The corporate form is deemed to be treated as an alter-ego of its shareholders and members when such individuals siphon its assets rather than paying corporate debt.
mere instrumentality theory
members dominated the entity in such a way that LLC had no will of its own
members used that domination to commit a fraud or a wrong; and
proximate cause
unity of interest test
there is such a unity of interest between the entity and its owners that the entity didn’t have an independent existence and failure to pierce would be inequitable.
types of stock
common stock provides shareholders voting rights and the rights to receive dividends
preferred stockholders generally do not receive voting rights but entitle holders to be paid out first upon dissolution.
When may a corporation issue new stock after incorporating?
A corporation may issue new stock after incorporating so long as it is (1): authorized to do so by the articles; and (2): it receives some return value for the stock
par value (some states)
Some states require the corporation to state a par value for the shares upon issuance.
The par value is the minimum price at which a corporation may sell the stock initially.
preemptive right
shareholders’ right to buy a percentage of newly issued stock equal to her current ownership percentage before it is offered publicly.
under rmbca, such rights do not arise unless expressly referenced by the articles of incorporation
stock repurchases
Generally, a corporation can repurchase its own stocks unless restricted by the articles of incorporation
These distributions might be improper if they would make the corporation unable to pay its debts
record date
Before any shareholder meeting, either the board of directors or the bylaws must set a record date.
The record date can’t be more than 70 days before the meeting date
Only shareholders of record on the record date may vote at the meeting and only in proportion to the amount of shares held on the record date.
shareholders annual meetings
must hold one
time and place are set forth in the bylaws or, if not, at the corporation’s principal office.
special meetings
can be called by shareholders if they hold at least 10% of the voting shares (or up to 25% if specified by the Articles of Incorporation)
meeting notice
- between 10 and 60 days notice required
- must communicate date, time and place
- must describe any means of remote communication to be used
- should specify the record date
- for special meetings, should state the purpose
How can one waive the notice requirement for meetings?
- by delivering an express, signed waiver to the corporation.
- By attending the meeting without objecting to the lack of notice.
shareholder meetings quorum
Unless the articles of incorporation provide otherwise, a quorum is satisfied if a majority of shares entitled to vote are properly present
voting trust
shareholder transfers legal ownership of their shares to a trustee.
trustee acquires the right to vote the shares
participants retain all other rights of stock ownership.
voting agreement
shareholders agreed to vote their shares a certain way
writing signed by all parties.
proxy voting
a shareholder appoints a proxy to vote that shareholder’s shares in her place
must be in writing submitted to officer in charge of votes
generally revocable unless both
their terms say they’re irrevocable; and
they are coupled with an interest
directors election
usually elected annually at a shareholder meeting
How may a director resign?
Delivering written notice to:
the board
the board’s chairperson
corporation’s secretary
filling vacancies
subject to the articles of incorporation, vacancies will be filled either by shareholders; or the board of directors.
Actions of the board
The board of directors may act by
meeting
written consent; or
committee
Board Action: Meeting; types of meeting
Regular; or
Special
Regular Board meeting
does not require notice
Special Board Meeting
Two day’s notice required
Must state time, date, and place of meeting to all directors
(no purpose required)
Effect of Directors’ lack of notice
A director who (1): didn’t receive notice; and (2): didn’t waive lack of notice can void any action taken at the meeting.
Meeting attendance
Generally, directors may participate by attending or using any remote communication method that allows for each to hear each other simultaneously.
quorum (director meeting)
majority unless articles of incorporation expressly provide a number no fewer than one third.
assent
a present director may avoid personal liability for the board’s action by indicating dissent or abstention.
a present director is deemed to assent to a corporation’s action under discussion at a meeting unless
he promptly objects
the director’s abstention is noted in the meeting minutes; or
he delivers written notice of dissent/abstention to the presiding officer during the meeting or to the corporation promptly after the meeting.
board action: written consent
an act is deemed an act of the board if all directors sign a consent that describes the act; and the signed consent is delivered to the corporation.
board action: committee
committee of fewer than quorum can commit the corporation to action
majority of board members must approve the committee and its members
committee must act in the scope of its authority
can’t:
approve distribution to shareholders unless within limits prescribed by full board
approve or propose to shareholders any act the shareholders must approve
fill board vacancies
adopt, amend or appeal bylaws.
officers
run day to day operations of the business
specific officers that may be required by states
president
secretary
treasurer
officers required by MBCA
one officer to maintain required records
officer appointment
Generally by the board of directors
but also, if authorized by the bylaws or the board, other officers
officer authority
officers are agents of the corporation and may act with actual, apparent or inherent authority
process for becoming an llc member
if an llc has not formed and only one member is planned, that person becomes a member by agreement with the organizer(s) (who may be that one member)
if an llc has not been formed and multiple initial members are planned, persons become members by agreement with each other.
If an llc has been formed, a person becomes a member by
any process in the operating agreement
merger or similar transaction
affirmative vote or consent of all existing members
any other means set forth in relevant statute.
LLC dissociation
members may freely dissociate by notice of express will to withdraw.
also death or incapacity
effect of dissociation
wrongful dissociation makes member liable to llc and its members for damages
ends the withdrawing person’s right to manage and conduct business as member
does not discharge withdrawing person from liability incurred while a member.
withdrawing person does not have a buyout right unless the operating agreement specifies one
withdrawing person retains his financial interest and accompanying right to future distributions
LLC dissolution
Occurs when
called for in the operating agreement
all members consent; or
a court enters an order of dissolution.
member-managed llc
presumption
equal rights in management and conduct
agents/authority to bind llc in ks it enters in the ordinary course of its business
fiduciary duties: corporations and llcs
Generally, actors who manage and control a business in corporate form owe fiduciary duties to the business and the owners
duty to act in good faith
duty not to break the law
duty to act on any red flags of corporate illegality
requires corporate directors to establish procedures to ensure compliance with legal norms, including
reporting systems providing timely, accurate information concerning the business’s
compliance with the law and
performance
duty of care
requires reasonable care
duty to be attentive to corporation’s affairs
duty to make informed decisions and to take adequate proactive steps to become informed
Generally, a fiduciary must review information
actively participate in meetings
may reasonably rely on information provided by third party professionals, corporate officers and employees and board committees
DUTY OF CARE LLC
some jds limit the duty of care to refraining from gross negligence or recklessness.
business judgment rule
under this rule, a court will presume the director acted in good faith, upon reasonable information; and
in the best interests of the corporation
presumption can be rebutted
does not apply to breaches of good faith or loyalty
duty of loyalty
avoid improper personal benefits; and
avoid conflicting interest transactions
improper personal benefits
prevents a fiduciary from improperly personally benefiting in the conduct of business activity (such as exercising voting rights in a way that prevents lawsuits against you.)
avoiding conflicting interest transactions
transaction in which the business is a party and:
the fiduciary individually is also a party;
the fiduciary knows of the transaction and has a material financial interest in it; or
the fiduciary knows a related person either is a party or has a material interest in the transaction
material financial interest
a monetary interest that one could reasonably expect to impair or influence the fiduciary’s exercise of objective judgment
related person
can include other business entities over which fiduciary has control
control
degree of influence or connection that could reasonably taint fiduciary’s objective judgment
power to remove majority of governing body
bearing the majority of the risk of loss or financial gain from an entity’s business.
safe harbor
A fiduciary may escape liability for a conflicting interest transaction if:
the board of directors approve it
the shareholders approve it, or
the transaction is objectively fair to the corporation.
board or shareholder approval
can validate a conflicting interest transaction only if (1): fiduciary discloses all material facts and (2): majority of disinterested shareholders or directors approve the transaction.
corporate opportunity doctrine
Under it, a fiduciary must not take personal advantage of a business opportunity if (1): the fiduciary should reasonably believe that the other party expects the opportunity to be offered to the corporation
business judgment rule
applies in the context of approval of conflicting interest transactions only if a majority of disinterested directors are
corporate opportunity doctrine
Generally, a fiduciary must not take advantage of a business opportunity that (1): involves a line of business which the entity either currently engages or will in the future unless (2): the opportunity is first presented to the entity; and (3): the entity ultimately rejects it by a vote of a majority of disinterested directors after full disclosure of all material facts;
fiduciary duties of shareholders in a close corporation
shareholders in a close corporation owe fiduciary duties only to the extent that they take on traditional roles of corporate governance and directorship.
majority shareholders can’t oppress minority shareholders
depleting corporate coffers for their own exorbitant salaries
refusing to have the corporation employ minority shareholders
share transfer restrictions
limit shareholders ability to sell shares (to ensure that the close corporation stays within the control of certain shareholders)
to be enforceable, the restriction must be reasonable utc
such a restriction is reasonable if it
requires a shareholder to obtain prior approval from board or other shareholders
provides a corporation a right of first refusal; or
requires the seller to sell to existing shareholders at a specified price.
binding effect of share transfer restriction on transferee
Restriction is binding against transferee if (1): it is authorized by the corporation’s governing documents and either (a): noted conspicuously on the stock certificate; or (b): the transferee took with actual notice of the restriction.
Resolving Deadlock
Deadlock can be resolved in a close corporation through:
buy-sell agreements
third party intervention
special class shares
state corporate statute remedies
buy sell agreements
an agreement that (1): the corporation or other shareholders will purchase a particular shareholders shares (2): in the event of irreconcilable deadlock
special class of shares
the aic may designate a special class of shares to cast the deciding vote in the event of a tie.
state corporate statute remedies
court might appoint custodian to break tie if other mechanisms fail to break deadlock.
Amending Articles
Directors must initiate
shareholders must approve
amending bylaws
Shareholder power shared with board unless
AIC reserves the power to shareholders exclusively or
shareholders in amending, repealing or adopting, expressly reserve that the board may not amend, repeal or adopt.
shareholder approved bylaw dealing with director nominations
may not limit board’s power to amend, add or repeal any procedure or condition to such a bylaw to provide for a reasonable, practicable and orderly process.
merger
two corps combine
one corp survives and the other ceases to exist
shareholders in the dissolving entity exchange their shares for shares in the surviving entity
appraisal rights
right of dissenting shareholder to compel corp to buy back stock at judicially determined fair market value after some extraordinary corporate event.
when do appraisal rights arise in the context of a merger?
when shareholder approval is required for the merger and the shareholder’s shares would not be outstanding post-merger; and
when a subsidiary merges with a parent or with another subsidiary under a common parent
how must one exercise appraisal rights
written notice before vote
can’t vote shares in favor of merger
corporation must pay fair market within 30 days
if shareholder properly disputes payments amount, corp must initiate judicial proceedings to determine amount within 60 days of
voluntary dissolution
board of directors adopt a resolution authorizing dissolution
shareholders approve dissolution
corporation files articles of dissolution with secretary of state
after dissolution
corp may not undertake new business
must continue operating to wind up
winding up
collecting and disposing of corporate assets
making provisions to pay creditors
concluding any pending litigation
distributing assets to shareholders
distributing assets to shareholders
creditors before shareholders
statutory procedure for discharging known claims
notice of dissolution instructing claimants to send their claims in writing to a specified address
include deadline of no less than 120 days after notice;
state claim will be barred if not received by deadline
claim is barred if claimant doesn’t meet submission deadline; or
corporation rejects claims and claimant fails to sue within 90 days.
