Corporations Flashcards
Who are the individuals involved in corporate formation?
- Promoters: Persons acting on behalf of unformed corporation.
- Subscribers: Individuals with written agreement to buy stock from unformed corp.
Who is a promoter and what does a promoter do?
A promoter is a person acting on behalf of an unformed corp.
A promoter is liable for all contracts entered prior to formation, or until novation.
A promoter is soely liably if a corpo is never formed.
What is a promoter’s duty?
A promoter has a fiduciary duty to corporation. Cannot obtain a secret profit.
If property is acquired before formation and sold to the corporation, a profit is recoverable if sold for more than fair market value
If property is acquired after formation and sold to corp, any profit is recoverable by promoter.
Define
De Jure Corporation
A de jure corporation is a validly formed corporation with general purpose for perpetual duration.
What is required to submit within the articles of incorporation for a de jure formation?
Articles of incorpoation include:
1. Authorized shares
2. Purpose of corp
3. Agent name & address
4. Incorporators names & addresses
5. Name of Corporation
Must be filed with the secretary of State in state of formation and valid corporations shield shareholders from liability.
Define
Ultra Vires Activity
An Ultra vires activty is if the de jure corporation states a specific purpose and the activities of the corporation exceed the scope of purpose.
Normally ultra vires activieis are valid, however, shareholders may seek:
1. Injunction
2. sue for losses based on ultra vires acts
De Facto Corporation
A de facto corporation is a business that does not fufill filing formatlities but may be treated as corporation if organizers have:
1. good faith attempt to comply with corporate formalitites
2. no knowlege of lack of corporation status.
Corporation by Estoppel
Corporation by estoppel will be deemed valid if:
1. A de facto corporation is formed
2. a 3rd party treated corp like de jure corp
3. 3rd party does not claim that there was not a corporation formed.
Piercing the Corporate Veil
A shareholder may be liable for personal bad acts if they:
1. Disregarding Corp formalities: think no shareholder meetings, not treating corp correctly.
2. Under capitalization: Corp fails to maintain adequate funds to cover potential liability.
3. Prevent fraud.
4. Alter ego: Cannot mix personal with business.
Mnemonic: DUPA (Dua Lipa - DU PA)
Define
Par Value Stock
Par value stock requires a minimum issuance price.
no par value means any valid consideration the BOD deems adequate.
Treasury Stock
Treasury stock is stock previously issued and reacquired, re-sold as no par
Acquiring property with par value stock
Acquiring property with par value stock is ok if the BOD values property in good faith as at least par value.
Consequences of Less than Par Value
If the stock is less than par value, the directors are liable for signing off on the issuance and the purchaser must pay full consideration for shares.
What are the statutory board requirement for a valid corporation
A board of directors (BOD) must have one member.
Shareholders may elect directors and may remove directors for any reason
Define
Quorum
A quorum is a majority vote of votes present at BOD meeting.
Each director is presumed to concur with BOD action unless dessent/abstention in writting.
Watered Stock
Watered Stock is when the sale is for less than the Par.
Required:
1. Is there Par Value
2. What compensation did the company receive for the Shares
3. is it under Par value.
Remedies
- Directors and purchasers may both be liable for the difference between purchase price and Par value if they were aware of Par value at the time of the purchase of stock.
What are the duties a director owes to the corporation
- Duty to manage the corporation
- Duty of loyalty
- Duty of Care
Directors are shielded from liablity by the Business Judgement Rule
Define
Business Judgement Rule
The BJR is a presumption that Directors manage the corproation in good faith and in the best interest of the corporation
Define
Duty of Care
A director must act with the care of a prudent person when conducting business, unless artiles have limited director liability for breach
Define
Duty of Loyalty
A director may not recieve and unfair benefit to detiriment of the corproation or shareholders, unless there has been material disclosure and independent ratification
Duty of Loyalty
Self-Dealing
A director recives unfair benefit in transaction with corporation.
Duty of Loyalty
Usurping Corporate Opportunities
A director receives unfair benefit by usurping an opportunity that the corporation may have pursued.
How may a director engage in independent ratification?
A director may defend a claim of breach of loyalty by:
1. A majority vote of independent directors
2. A majority vote of a committee with at least 2 independent directors
3. A majority vote of shareholders.
Define
Interested Director Doctrine
A contract entered into by a directros is invalid unless:
1. the BOD approves the transaction after disclosure
2. Director does not vote on transaction
3. Shareholders approve the K after disclosure or
4. K is fair
