Corporations Flashcards
What’s a corporation?
A distinct legal entity that can conduct business in its own right by buying, selling, and holding property or by suing, being sued, and lasting forever.
They have (1) limited liability and (2) promote investment.
Parties in a Corporation
(1) shareholders
(2) directors
(3) officers
What do shareholders do?
investors, ultimate owners of a residuary interest (anything left after debts are paid) in a corporation
What is needed for the Articles of Incorporation?
Must include the corporations name and filed with the state
May enumerate powers that the C possesses, or limit its duration; may include a statement of C’s legal purpose
When does the corporations existence begin?
When the Articles of Incorporation are filed, unless the articles establish a later date
De Jure Corporation
When all statutory requirements for incorporation are satisfied, C is liable for all activities
Defective Incorporation: Lack of Good Faith Effort
A person who conducts business as a corporation without complying with the requirements is personally liable for the non-existent corporations obligations
Defective Incorporation: Good faith effort (how to escape liability)
De facto Corporation
or
Corporation by Estoppel
What is a De Facto Corporation?
The owner must make good faith effort to comply with requirements and without knowing the requirements were not met
What is Corporation by Estoppel?
A person dealing with an entity in a contractual agreement as if it were a corporation is estopped from denying its existence and seeking personal liability
Common Stock
Basic ownership interest that entitles the owner to vote on corporate governance matters
Preferred Stock
Has preference over other stock with regards to distributions
Who issues (authorizes) stock?
Board of directors and/or shareholders
Who distributes stock?
Board of directors, usually in the form of cash dividend payments
May shareholders sue to compel distribution of stock?
Yes, by proving the existence of funds legally available to pay a distribution and D’s bad faith for refusing to pay the distribution
Sale of Securities: Private Restrictions on Sale- Enforceability
The security must be certified, the restriction must be conspicuously noted on the security certificate, and the person must have knowledge of the restriction
2 Instruments of Governance
Articles of Incorporation
Bylaws
Bylaws
Lawful provisions for the management of the business and regulation of its affairs, not inconsistent with the articles
What controls if the Articles of incorporation and the bylaws conflict?
The Articles of Incorporation control
When are organizational meetings required?
For appointment of officers, adoption of bylaws and approval of contracts
Shareholder Meeting Types
Annual
Special
Annual Meeting - purpose
Primary purpose is to elect directors
Who can call a special meeting?
May be called by board of directors or shareholders who own at least 10% of voting shares
Notice of Meeting requirements
Voting shareholders must be notified of time/date/place in a timely manner no less than 10 days and no more than 60 days before the meeting.
How may a shareholder waive notice for a meeting?
Shareholders may waive notice either in writing or by attending the meeting.
Voting Requirements
Generally, only record owners of voting stock are permitted to vote; an owner of stock at the close of business on the record date has no right to vote; corporation generally cannot vote its own stock
Quorum Requirements
Majority of the votes entitled to be cast on a matter
Proxy Voting
Must be in writing and delivered to the corporation and its agent
Shareholder Suits: direct actions
An action to enforce shareholder rights for breach of fiduciary duty by director or officer, or an action based on grounds unrelated to shareholders status
Derivative Actions
Shareholder sues on behalf of Corporation for harm suffered by C
When does a plaintiff have standing in a derivative suit?
The P must have been a shareholder at the time of the wrong and at the time the action is filed, must continue to be a shareholder during the litigation, and must fairly and adequately represent C’s interests.
Who pays litigation expenses in shareholder suits?
Plaintiff can seek reimbursement from the corporation for reasonable litigation expenses
Personal Liability of Shareholders in a Corporation: General Rule
Generally, 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” to avoid fraud
Why would a court pierce the corporate veil?
To prevent fraud or unfairness
What is piercing the corporate veil?
Piercing the corporate veil would remove the corporates shield and allow shareholders to be personally liable
Three Factors in deciding whether to pierce the corporate veil?
- Alter ego
- Under-capitalization
- Fraud
Alter Ego (factor for piercing corporate veil)
The investor or shareholder has failed to observe any corporate formalities between the person and the corporation– treated the company just like itself
example: personal funds intermingled with the company’s funds
Under- Capitalization (piercing the corporate veil factor)
Failure to maintain funds sufficient to cover foreseeable liabilities
Fraud (piercing the corporate veil factor)
The parties engaged in fraud or fraud-like behavior
Are courts more likely to pierce the corporate veil in tort or contract actions?
Torts, and more likely in small, closely held corporations
Why form a Corporation?
Limited Liability and Promoting Investment
What is corporate law?
Set of state laws governing the structure of corporations and the rights and responsibilities of the participants in corporations
Directors- who elects them and what are they responsible for (generally)?
Elected by shareholders, responsible for major corporate decisions and to appoint officers
What do Officers do?
Run the corporation on a daily basis
Are corporations liable for pre-incorporation agreements?
No
Who are personally liable for contracts entered before the corporation exists?
Promoters
Must the corporation file bylaws?
No, but almost all corporations have bylaws.
Do shareholders owe a duty to other shareholders?
NO
Who may a controlling shareholder owe a fiduciary duty?
To minority shareholders in two circumstances:
- Sale of stock to an outsider (when intent is to destroy the company)
- Controlling shareholder transactions with the corporation
- a controlling shareholder who receives a special distribution or otherwise conducts major business transactions to his own benefit owes a duty of loyalty
How many directors must a corporation have?
At least one.
What duties do Officers owe?
Loyalty and care
Duty of Care: What is the Business-Judgment rule?
In the absence of fraud, illegality, or self-dealing, courts will not disturb good-faith business decisions
Who are protected from legal liability under the business judgment rule?
Directors and officers are protected from legal liability under the business judgment rule.
What is the standard of care for Duty of care?
Act with the care that a person in a like position would reasonably believe appropriate under similar circumstances
Special skills are expected to be used
What is the reliance defense?
A director or officer is entitled to rely on the expertise of officers and other employees, outside experts and members of the board
What is the general rule for Duty of Loyalty?
May not receive an unfair benefit to the detriment of the corporation without effective disclosure and ratification
Self-Dealing Transactions
A transaction in which the director, officer, or other relative receives a substantial benefit directly from the corporation
Corporate Opportunity Doctrine (duty of loyalty)
Usurping or stealing a corporate opportunity
When may a self-interested transaction be upheld?
A self-interested transaction may be upheld if its disclosed and ratified by:
a majority of disinterested directors or
a majority of disinterested shareholders
Indemnification
The practice of corporations paying for the costs of a director or officer’s defense in litigation, usually by purchasing insurance
When is the corporation ALWAYS required to pay the costs of defense of director or officer?
If the case is successful
When CANNOT the corporation pay for a suit against an officer or director?
If the officer or director is liable for receiving an improper benefit from the corporation or otherwise loses the lawsuit
Permissive Indemnification
The corporation may, but is NOT required to indemnify an officer or director for the costs of a law suit if the officer or director
- Acted in good faith with no intent to harm the corporation; or
- Had no reasonable cause to believe the conduct was illegal
Who must approve fundamental changes?
Both shareholders and directors
What is a merger?
The combination of two or more corporations where one corporation survives and assumes the assets and the liabilities of the other corporation
Dissolution
The existence of a corporation is extinguished either voluntarily by the shareholders and directors or
involuntarily by disgruntled parties
May a corporation be dissolved involuntarily by creditors?
Yes, if the creditors show that the corporation is not paying its debts
How may shareholders have a corporation dissolved?
If they can show:
- The corporate assets are being wasted
- Directors are acting fraudulently; or
- directors and shareholders are deadlocked
If a shareholder does not wish to participate in a merger, asset sale, share exchange or amendment to the articles, what are they entitled to do? (dissenters rights)
Entitled to have their shares purchased from them by the corporation at a fair value determined by the court
How does a shareholder invoke dissenters rights?
- Must send written notice to the corporation prior to the vote
- The shareholder must abstain or vote “no”
- The shareholder makes prompt written demand for FMV after action has been approved
Limited Liability Company
LLC combines the limited liability of corporations with the tax treatment of a partnershipLLC
LLC- limitations?
No limitations on the number of shareholders, no residency requirements, and no natural person requirements
LLC formation
Files articles of incorporation and operating agreement with the state
What are owners called in an LLC?
Members, rather than shareholders
Who is an LLC presumed to be managed by?
ALL of its members
Winding up
Dissolving Corporaton can continue to exist to collect assets, dispose of property not distributed to shareholders, discharge liabilities, and distribute property among shareholders according to their interests
