Corporations Flashcards
major players in a corporation
shareholders: own the stock in a corporation and are the residual owners of the firm
board of directors: responsible for high level decisions and for selecting the officers/employees
officers/employees: day to day decisions of the corp
promoter
engages in activities such as raising capital and forming contracts in order to bring a corporation into existence
the duties of a promoter
each promoter is understood as being in a joint venture with the other promoters and therefore they owe each other fiduciary duties
cannot act to receive personal gain
owes fiduciary duties to corp/investors: cant benefit personally at the expense of the corp
liability of the promoter
personally liable for pre-incorporation transactions
an express adoption or use of the contractual benefits by the corp is not enough to release promoter
can only be released through a subsequent novation
corporation may indemnify the promoter
promoter’s entitlement to reimbursement
will generally have a right to reimbursement if the promoter is held personally liable for a pre-incorporation agreement made in good faith
should be calculated based on the benefits received by the corp
promoter does not automatically receive reimbursement for corporate formation costs but corp can choose to repay them
Corporation’s liability for pre-incorporation transactions
not generally liable- promoter is not their agent because the corp does not yet exist
can become liable if they adopt the contract by accepting the benefits of the transaction or accepting liability
incorporator and their liability
the person who signs and files the articles of incorporation with the state
not liable for pre-incorporation contracts
what is the primary document for creating a corporation
articles of incorporation
what are the requirements for the articles of incorporation
1)must be filed with the state corporation commission
2) must include the name of the corp and other basic info
name must include special words- corp./co./company etc.
name cannot suggest its an llc
3)must include the place in Virginia where its main office is
4) must include the number of shares that the corporation is authorized to issue
what is something that can be included in the articles but doesnt have to be
a corporate purpose
commonly use broad statement, but narrower business purpose can be named
ultra vires
if the articles of incorporation state a narrow business purpose and the firm conducts activities outside this stated purpose
challenging an ultra vires activity, who can do it
a third party who contract with the corp cannot asset that a corp has acted outside of its purpose to escape liability
can only be challenged:
1) a shareholder can sue to enjoin the corp from conducting the act
2)the corp can take action against a director/officer who engages in the act
3) the SCC can initiate a proceeding against the corporation to enjoin the act
what are the corporate powers
to sue/be sued
to make and amend bylaws
to purchase/transfer property
to contract
to lend money
to elect/appoint officers
to establish pension plans
to insure
to pay compensation
other powers can be enumerated in the articles
additional requirements to establish a corporation
registered agent
the articles must be filed with the state
the legal existence begins upon filing or on a later date stated in filing that does not exceed 15 days
who can be a registered agent
a resident of VA who is either
1) a director/officer of the corp, or
2) a member of the VA bar
agent can be another corp/llc as long as:
1)corp is not its own agent, and
2)the other entity lists at least one natural person
what happens when all requirements of corp formation are met
a de jure corporation is formed
what is a major consequence of a de jure corporation being formed
the other parties associated with the corp will enjoy limited liability for activities undertaken by the corp
what impacts how you amend the articles
whether or not stock has been issued
how to amend the articles if no stock has been issue
BoD may amend, or
if they have not been selected, the promoter may amend
how to amend the articles if stock has been issued
three step process:
1)board must approve the amendment
2) board will submit the amendment to the shareholders for consideration
must be given:
i)a notice period between 25 and 60 days for the vote, and
ii) a copy of the amendment
3) shareholders must vote to approve
default: 2/3 of shareholder but articles can set any standard that is not less than a majority
if multiple classes of stock- each class impacted holds a separate vote
4)after proper approval is obtained, deliver to the SCC
Special situations with amending the articles
1)amendment imposes new liability on the shareholders:
i)each shareholder must sign a separate written consent to such liability, and
ii) the consent will only apply to liabilities that arise after the amendment becomes effective
2)minor amendments: board may approve the amendment even if there is outstanding stock
willful failure to incorporate
if someone purports to conduct business in VA as a corp without making any effort to comply with the requirements, that person will be guilty of a misdemeanor
de-facto corporation
good faith effort to incorporate fails
not followed in VA
corporation by estoppel
when a defectively formed corp holds itself out as a valid corp to a third party, cant avoid liability by raising lack of corporate status as defense
the outside party cannot normally recover from the personal assets of the business owner
exception: if third party knew they were not a corp
additional acts following the filing of the articles
draft bylaws
hold organizational meeting
ratification
bylaws
acts as additional operating rules that corp may adopt to govern its affairs
may contain any lawful provision related to the internal working of the corp
cannot be inconsistent with articles- articles control
may contain forum selection provision, but cant prohibit internal claim from being brought in VA or require arbitration
how to amend bylaws
depends on whether stock has been issued
1) no stock issued: board or promoter can amend
2) stock issued: either board or shareholders can amend
articles can reserve power of amendment to shareholders alone
organizational meeting
meet to appoint officers, adopt bylaws, and approve pre-incorporation contracts
if not already done, directors will be appointed
ratification
ratifying any corporate action purportedly taken that would have been within the power of the corp but is void or voidable due to a failure of authorization
BoD must adopt a resolution approving the ratification
two types of securities
equity: convey ownership and control interests in the corporation
share of stock
debt: do not convey ownership and control interest
a bond
types of equity securities
common stock: when the corp issues stock and does not set forth any special terms/conditions
preferred stock: may have special rights or conditions, including:
special voting rights
right to redeem/incorporate the shares at the corporation’s option
the right to redeem the stock for property
the right to redeem the stock according to a formula in the articles
the right to allow for distribution in any manner
the right to have a preference to get paid first over any other class for distribution
debt securities
create a contractual debtor-creditor relationship between the corporation and the outside lenders
may be secured or unsecured
may be barrer negotiable or registered
may enjoy special features, such as the right to convert the debt into stock
how are shares of stock authorized
must be authorized by the BoD, unless articles say something else
cannot issue more shares than are authorized in the articles
if they do they are void and the purchaser can recover the money
how can a firm increase the number of authorized shares
by amending the articles
fractional shares
a scrip that represents a fractional share
the holder may combine scrip into full shares and exchange these for a normal share of stock if the scrip specifically allows
rights of fractional shareholders
same rights as full shareholders
BoD may place some conditions on the scrip including voiding scrip that is not exchanged for a full share by some date
share certificates and what happens if not used
shares can be evidenced by a certificate but this is not required
if used, they should state:
1)the name of the company
2)the fact that it is incorporated in VA
3)the name of the shareholder, and
4)the humber and class of shares
if shares are not certificated, corp must deliver a written statement with this same info to shareholders within a reasonable time
consideration for stock
shares can be issued for any type of benefit to the corporation
ex.: cash, property, services, promissory notes
amount will be determined for the corp by the BoD
Par value stock
may be issued by the corporation
the value of the stock will be specified in the articles and corp must receive at least this amount before stock is issued
if property is contributed, director must evaluate whether the value of the property exceeds the par value: evaluation is binding unless there is a knowing and intentional overvaluation of the property
if no par value can be sold at any price specified by the directors- can be diluted
stock subscriptions
after the articles are filed but before the directors are elected, a person may subscribe to purchase stock from the corp when it comes alive
irrevocable for 6 month, unless all parties agree to revoke
can explicitly specify if longer/shorter period
Preemptive rights
corp does not automatically have preemptive right but can provide for them in the articles
allow shareholders to maintain a proportional share of ownership in the corp
when is federal registration required
only required for public offerings
exception: sale of stock to just a few investors, especially sophisticated investors, may not trigger registration requirements
what does federal registration require
a detailed registration statement with the SEC and the delivery of a prospectus
what happens if a corporation fails to comply with the registration requirement
a purchaser of the security:
1)may sue to rescind the transaction, and
2) may recover compensatory damages caused by an error or omission in the registration statement
the investor must not have purchased the stock with knowledge of the error
who may be liable for failing to comply with registration requirement
the issuing corp
any signer of the registration statement
a director of the issuing corp
an expert named as having prepared or certified the statement
the underwriter of the issue
distribution
the transfer of cash or property from the corp to one or more of the shareholders
also known as a dividend
who authorizes a distribution
the board of directors unless articles say something else
stock split
corporation can issue new shares as a distribution if permitted in the articles
also known as a share dividend
can corp issue a different class of shares as a distribution
maybe, as long as at least one of the following is true
1)the articles of incorporation permit it
2)the majority of votes entitled to be cast by the class to be issued permit it
3) there is no outstanding stock of the class to be issued
insolvency and distribution
a corporation cannot make a distribution if it is insolvent
what make a corporation insolvent
1)payment of the distribution would prohibit the corp from paying its debts as they become due in the normal course of business, or
2)the liabilities of the corp exceed its assets
liability for unlawful distribution
a director who votes for/agrees to an unlawful distribution in violation of her duty to care or loyalty will face personal liability to the corp and its creditors for the excess amount of the distribution
director is entitled to contribution from other liable directors
director may recoup payments from any shareholder who accepts the unlawful distribution on a pro rata basis
record date
set by the directors and everyone owning the shares on that date will receive the distribution
are restriction on stock transfers permitted
yes
common in smaller corps
where can transfer on stock restrictions be found
the articles of incorporation
the bylaws, or
an agreement among shareholders or between shareholders and the corp
validity of a transfer restriction on stock
will be valid as long as
1) the restriction has a lawful purpose, and
2) the restriction does not create an undue restraint on alienation
determining reasonableness of a stock transfer restriction
is a question of fact but an absolute restriction on resale is generally considered unreasonable and void
restrictions against third party purchasers of stock
are enforceable so long as
1)the restriction is noted on the stock certificate, or
2)the purchaser has actual knowledge of the restriction
two types of federal causes of action
10(b)-5
16(b)
Rule 10(b-5
governs the fraudulent purchase or sale of any stock/other security
enforced by SEC
10(b)-5 requirements to bring private COA
a private investor can bring a private COA by establishing:
1)plaintiff must have bought or sold a security
*D doesnt have to be a participant in the transaction
forced sale doctrine: forced exchange of shares in a merger will count as a sale
2)must involve interstate commerce
*look for phone/mail, not personal
3)D must have engaged in fraudulent or deceptive conduct
primary forms:
i) making an untrue statement of material facts, or
ii) failing to state a material fact that is necessary to prevent statements already made from being misleading
bespeaks caution doctrine: opinion accompanied by adequate language not misleading
4)conduct must relate to basic, material info: something a reasonable investor would find important when deciding
5)D must act with intent or recklessness (scienter)
6) P must have relied on Ds conduct
fraud on the market: misleading public statement is presumed to satisfy the reliance element
reliance must also be justifiable
7)P must have suffered damages/harm from conduct
i) out of pocket losses: time of fraud vs. price paid
ii) rescission: permitted if D was involved
iii)punitive: not allowed
BIDBIRD
Section 16(b)
governs insider short swing profits
restricts insiders from rapid trading profits related to firm’s stock; reason for trading doesnt matter
during any six month period, an insider who both buys and sells his corps stock is liable for any profits
required to report any change in stock ownership to the SEC
who is protected under Section 16(b)
1)corporations with securities that trade on a national exchange
2)corps with more than 10 mil in assets and more than 500 shareholders
who are governed by section 16(b)
corporate insiders
shareholders holding more than 10% of any class of stock
insider trading
abstain or disclose rule: a person who merely possesses material inside info wont be liable under 10b-5 unless also trades a security based on this knowledge
presumed if possessed the info at the time of the trade
exception: trades made according to a pre-existing written plan
who may be liable for failing to disclose inside info
1)insiders: directors, officer, employees
2)constructive insiders: persons with access to inside info based on relationship with corp
3)tippees: receives info from an insider, must:
i) receive a personal benefit from the tip, and
ii) know that the info was provided by a tipper in violation of duty to corp
4)misappropriators: person who wrongfully uses confidential info of one party in order to trade stock in a different corp
state cause of action for trading stock
tort of fraud
tender offer rules with stock
an offer to shareholders of a publicly traded corp to purchase their shares at a fixed price: hostile takeover
a person who acquires more than 5% of any class of stock needs to file a statement with SEC revealing:
1)percentage ownership
2) source of funding, and
3) purpose in acquiring stock
two types of shareholder meetings
annual and special
annual shareholder meetings
time and place specified in the bylaws
main purpose: elect directors but any proper business decision may be addressed
special shareholder meetings
held to address a purpose specified in the notice of the meeting
no other corporate business can be conducted
called by pres or BoD, but articles may allow someone else
special rule: if a corp is nonpublic and has 35 or fewer shareholder, may call a special meeting by a group of shareholders owning at least 20% of entitled shares
notice for shareholder meetings and when is it not required and how can it be waived
written notice must given that says time, date, place of the meeting
must be given between 10 and 60 days from the meeting date
meetings involving a fundamental corporate change: must be given between 25 and 60 days
special meetings: must include purpose
may be delivered by any method used in commercial practices
not required if:
1)notice for 2 consecutive annual meetings were returned undeliverable, or
2) two consecutive distribution within 12 month period were returned undeliverable
waived by writing or attending the meeting
where must shareholder meetings take place
can be held anywhere but special meetings must be held at principal office unless another place is mentioned in the notice
what to do if a corp is not holding timely shareholder meetings
shareholder can petition the circuit court for an order compelling for:
annual meetings: if more than 15 months has lapsed
special meetings: corp has not given notice of the meeting within 30 days of the receipt of the requiste number of demands for special meeting, or
meeting not held in accordance
shareholder voting eligibility
onweship of stock entitles a shareholder to vote- one share, one vote
co-owners: either may vote
executors or guardian can vote on proof of authority
treasury stock cannot be voted
determining ability to vote is based on record date which cannot be more than 70 days before the vote
what decisions require a shareholder vote
primary issue: electing BoD
also fundamental corporate changes such as an amendment to the articles or a merger
Quorum of shareholder
established by a majority of the votes entitled to be cast
may be adjusted by articles but cant be lower than 1/3
can be remote if:
1) firm can verify that the participant is a shareholder, and
2) communication equipment can provide a reasonable opportunity for participation
shareholder vote approval requirements
usually requires a majority of votes cast at a vote with a quorum present
how to vote for directors
Normal method: a plurality vote: nominee with the most votes wins
Cumulative voting: may be established by the corp
each shareholder multiplies number of shares by number of directors to be elected
proxy voting
can be done
must be executed in writing and delivered to the corp/its agent
valid for 11 months, unless otherwise stated
can be revoked, unless irrevocable and couple with interest
proxy remains valid after death of SH unless corp has notice before proxy acts
two types of shareholder agreements
voting trust
pooling agreement
used to govern voting rights and other managerial interests
voting trust
agreement where all the participating shareholders transfer their shares to a trustee who then votes the shares and distributes distributions
trust: legal owner of shares
shareholders: equitable owners of the shares
if established before July 1, 2015 limited to 10 years, but can be renewed
pooling agreement
agreement among shareholders to vote all shares together as the majority of those in the agreement dictate
does not separate voting power and owner benefits
shareholder management agreements
allows shareholders to alter the way in which a corp is managed, even if inconsistent with normal statutory governance provisions
can adjust numerous matters:
1)elimination of BoD
2) restriction on the discretion/powers of the board
3)authorization or making of distributions
4) determination of who is a director/officer
5)exercise/division of voting power
6)transfer/use of property or services
7)transfers to one+ shareholder of all or part of the authority to exercise the corporate powers
8)the dissolution of corp at request of 1+ SH
9)exercise of the corporate powers and the affairs of the corp
where must a shareholder management agreement be set forth
and how may it be amended/terminated
1) in the articles/bylaws and approved by all persons who are shareholders at time of the agreement, or
2) in a written agreement signed by all persons who are shareholders at the time of the agreement and that is made known to the corp
only by all persons who are shareholders
limits to a shareholder management agreement
1) must be noted conspicuously on each certificate, or if no certificate sent to the shareholder
2) ceases to be effective when corp becomes public
3) directors are relieved of liability for acts/omissions to extent of limits set by the agreement, and person vested with the power is subject to the liability
4) a management agreement is not a ground for imposing personal liability on shareholders for corporate acts or debts
right to inspect corporate records
shareholders have the right to do this
applies to a record shareholder, beneficial shareholder, or an agent/attorney appoint by shareholder
independent of discovery for litigation
differentiate between without purpose or with proper purpose
inspecting corporate records without purpose
no restriction during regular business hours at principal office:
1)current articles/bylaws
2)most recent annual report
3)names and address of current directors/officers
4)shareholder meeting minutes and all written communications with shareholders within last 3 years
5) any board resolutions creating one+ classes of shares
inspecting corporate records with proper purpose
types of records:
1)other materials from board meetings
2) accounting reports/related work papers used in prep of financial statements
3)record of corps current shareholders
four key requirements:
1)shareholder demanding info must have held stock for at least 6 month or hold at least 5% of shares
2) demand must be in pursuant of proper purpose and made in good faith: relates to shareholder’s interest in the corp
improper purpose: harassment, gathering secrets
3)shareholder’s demand must describe with reasonable particularity the purpose and the records desired to be inspected/copied
4)requested records must be directly connect with the inspection purposes
corp may enforce reasonable restriction on confidentiality or use of the records
notice required for inspecting corporate records
must be made at least 10 business days before the inspection and delivered to corp’s secretary
when a corp improperly denies inspection rights
shareholder may obtain:
1)expedited court proceeding to secure access, and
2)seek reimbursement for litigation costs
financial statements
shareholder may also be able to obtain financial statements as follows:
1)all corps are required to provide the most recently published financial statement to a shareholder upon request
2)public firms that have issued securities typically required to supply shareholders with an audited financial statement under fed securities law
Types of actions brought by a shareholder
direct shareholder actions
derivative actions
direct shareholder actions
two basic circumstances:
1)an action to recover for harm linked to their rights as a shareholder
2)an action that does not arise based on Ps status as a shareholder
recovery will go to the shareholder
derivative actions
a shareholder seeks to compel the corp to file a lawsuit to recover for harm suffered by the corp itself
things:
standing
demand
dismissal
consequences
standing for a derivative action
claimant must:
1) be a shareholder at the time of the act/omission
2)become a shareholder through transfer from someone who was a shareholder at time of act
3)become shareholder before public disclosure and without public knowledge of the act
must also be able to fairly represent the interests of the corp
demand for a derivative action
P must make a written demand upon board to take action
after demand is made, shareholder can commence:
1) if no response for 90 days
2)if waiting for response would lead to irreparable harm
3)if demand is rejected, by alleging that the corps review and evaluation procedures were not complied with
dismissal of a derivative action
court may dismiss if disinterest directors take the following steps:
1) conduct an adequately informed review and evaluation of the allegations
2)determine in good faith that continuing the litigation is not in the best interest of the corp
3)submit a short statement of reasons for determination
determination should be made by either:
1)majority vote of disinterested directors, or
2) majority vote of a special committee consisting of 2+ disinterested directors appointed by majority of disinterested directors
consequences of a derivative action
any settlement must be approved by the court
corp gets the recover
shareholder can recover litigation expenses if lawsuit results in a substantial benefit to the corp
shareholder may need to pay Ds litigation expenses if no reasonable cause/arbitrary purpose for the litigation
Piercing the corporate veil
challenging the limited liability of the shareholders
if successful, the existences of the corp will be ignored and the shareholders will be held personally liable
factors to look at for piercing the corporate veil
was there respect for the corporate formalities?
1)lack of required meetings
2)lack of minutes
3)inappropriate decision making
4) commingling of personal/corporate funds
was the corp used to promote fraud/injustice:
1)inadequate capitalization
2)lies
3)shareholders abusing limited liability protection
the power of the board of directors
has ultimate authority for exercising corporate power
manages and directs decisions of the corp
can appoint and authorize officers and employees to carry out day to day business
board composition and selection
number established in the articles or bylaws- can be increased or decreased
dont need specific qualities unless otherwise specified
selected by a shareholder vote at the annual meeting
director length of term
typically one year unless elections for board members are staggered, then it is 3 years
a directors whose term expires can continue to serve until:
1)successor is elected and qualified, or
2)number of directors is decreased
directors may resign at any time by delivering written notice to board, chair, secretary
vacancies will be filled by shareholder vote, director vote, or vote of majority of remaining shareholders
who can remove directors from the board
shareholders
court by court order
removal of a director by shareholders
must be at a meeting called for that purpose- notice
director may also be removed by written shareholder consent if permitted by articles
dont need cause to remove unless articles
director elected by cumulative voting can be removed unless votes sufficient to elect director are cast against removal decision
removal of director by court order
permitted if director:
1)committed fraud against corp/shareholders
2)grossly abused the position of director, or
3) intentionally harmed the corp
court must deem in the best interest of the corp
meeting requirements for directors
may hold regular or special meetings
notice only required for special meetings- verbal notice is ok if articles/bylaws allow
waive notice explicitly or by attending
board may take action without meeting if each director signs a written consent unless articles/bylaws say otherwise
voting requirements
requires a quorum of directors present at the meeting: majority of all directors, unless otherwise stated- cant be less than 1/3
based on number of directors mandated- vacancies dont reduce number need for quorum
how can a director avoid liability for action taken by board at meeting
must dissent by:
1)promptly objecting to the holding of the meeting/transaction at start of meeting
2)vote against the action/abstain from vote and have dissent entered into minutes, or
3)delivering written notice of dissent/abstention to the presiding officer of the meeting before its adjournment or to secretary immediately after adjournment
director voting agreements
generally unenforceable
impact of unanimous consent of shareholders
Whenever the board of directors must take any action or recommend or approve any proposed
corporate act, this action, recommendation, or approval is not required if the proposed action or corporate act is adopted by the unanimous consent of shareholders.
director committees and what they cant do
a majority of the directors must vote for:
1)creation of the committee, and
2) the appointment of a director to the committee
non-board members can be appointed to a committee but cant vote on matters when performing a function of the board
what they cant do:
1)authorize or approve distributions (except within limits set by the full board)
2) approve or propose actions that require shareholder approval
3) approve a plan of merger
4)fill vacancies on board/committees
5)amend the articles
6) adopt, amend, or repeal bylaws
7)authorize or approve the issuance/sale/contract for sale of shares
director committees and publicly held corps
typically will have the following committees:
1)audit committee
2)compensation committee
3) nominating committee
sarbanes-oxley act: corp with stock listed on national exchange must have an audit committee
member must be independent directors
main duties of a director
duty of loyalty
duty of care
required to act in good faith in discharging these duties
business judgment rule
a director is entitled to a rebuttable presumption which protects decisions made with good faith business judgment of the best interests of the corp
doesnt matter if it ends up being a bad decision
duty of care
must not behave in a grossly negligent or reckless manner in connection with business decisions
director is entitled to rely on opinions of officers, experts, committees, if believed to be reliable and competent
director will not be liable if absent from meeting when decision made or dissent from the decision
duty of loyalty
requires a director to act un an unselfish manner by not placing his interests ahead of the corp
types:
self-dealing
competition
waste
self-dealing
directors cannot engage in a conflict of interest transaction with own corporation: must not profit at the firms own expense
safe harbor exceptions:
1)committee of board approves the transaction with knowledge of all material facts, including personal interest
2)shareholders approve the transaction with knowledge of all material facts
3)transaction is fair to the corp:
i)would the transaction have been approved by a disinterested BoD
ii)would the same result have been accomplished between two parties of equal bargaining power who were not under duress
competition/usurpation
a director may not engage in a business venture that competes with the corp
corp may limit/eliminate this duty in its articles
director may engage in unrelated business ventures
Waste
a director may not waste corporate assets by using resources in a way that is not in the best interests of the corp
indemnification
director seeking from the corp for any expenses and any judgment if she is involved in a legal action as a consequence of role as director
types:
mandatory
prohibited
permissive
mandatory indemnification
a corp is required to indemnify a director for expenses incurred in a wholly successful defense of a proceeding against the director
may seek court order compelling
prohibited indemnification
corp may not indemnify a director against liability stemming from:
1)willful misconduct or a knowing violation of criminal law, or
2)receiving improper personal benefits
permissive indemnification types
general indemnification
specific proceeding indemnification
general indemnification
permitted if auhtorized by:
1)articles
2)bylaw
3)shareholder resolution
firm may also provide advancement of expenses
specific proceeding indemnification
may indemnify a director if the director:
1)acted in good faith
2)held a reasonable belief that conduct was
i)in best interest of the corp, or
ii)not opposed to the best interest of the corp
3)in a criminal proceeding, did not have reasonable cause to believe that conduct was unlawful
satisfaction of these requirements must be determined by either:
1)a majority vote of disinterested directors
2) special legal counsel chosen by disinterested directors, or
3)the shareholders
expense advancement for directors
A corporation may advance funds if the director gives the corporation a signed written undertaking to repay funds advanced if the director is not entitled to indemnification.
Must be an unlimited general obligation, but need not be secured
Need not consider the financial ability of the director to make repayment
must be authorized by:
1) a majority of disinterest directors if at least two exists, or
2) the shareholders
court ordered indemnification
permitted when the court determines that it is fair and reasonable
can apply regardless of whether corp otherwise provides/refused to provide indemnification
liability insurance
corp may also purchase liability insurance to indemnify directors for actions arising from services as director
caps on director liability
statutory cap is the greater of:
1)100,000 or
2)the cash compensation received by director during last 12 month period
corp can have their own cap but it cannot be higher
director inspection rights
directors have inspection rights for any purpose related to their duties as a director
can seek court order of corporation refuses access
VAs requirements regarding officers
does not require a corp to have specific officers
designation of officers and duties are left to bylaws/BoD
key officers
president
secretary
treasurer
authority of officers
they are agents of the corp and may bind the corp in contract law so long as they have authority:
express
implied
apparent
selection of officers
selected by the BoD
Personal liability of officers
do not normally incur personal liability for the performance of duties related to the corp, but may personally be liable for acts to guarantee a contract or commit a tor in own capacity
duty of officers
same fiduciary duties of care and loyalty
duties will be defined in bylaws or set by the board
entitled to rely on:
1)performance of properly delegated responsibilities by corporate employees whom officer believes in good faith to be reliable/competent
2)information, opinion, statements presented by employees other experts in good faith
federal requirement for officers
Sarbanes Oxley requires the CEO and CFO of public companies to certify the accuracy of financial statements with the SEC, and
forfeit incentive based pay if the financial reports need to be restated
indemnification of officers
same as directors
resignation/removal of officers
may resign at any time by delivering written notice:
1)may provide for delayed effectiveness
2)resignation does not affect contract rights
officer may be removed at any time with or without cause by:
1)board of directors
2)appoint officer, or
3)any other officer authorized
contract rights can still be implicated
Statutory merger
the combination of two+ corps where only one survives
if a new surviving form is created called a consolidation
procedure for a statutory merger
1)BoD for each corp must adopt a resolution authorizing the merger
2)notice must be given to shareholders between 25 and 60 days before meeting
must include a summary of the plan
3)shareholder of each corp must approve the merger: 2/3 unless otherwise stated
4)required documents are filed with the commission
shareholder approval of merger
2/3 must approve
taken for each separate voting group if exists
necessary vote may be increased or decreased but not below a majority
what happens if a small corp is being merged into a larger one
shareholder vote not needed by surviving shareholders if:
1)number and rights of their shares are unchanged
2)number of share entitled to vote unconditionally in the election of directors is not increased by more than 20% and
3)the articles of incorporation are unchanged
short form merger
applies between a parent and subsidiary when the parent owns at least 90% of the voting power of the subsidiary
permitted without approval by BoD/shareholders of subsidiary or shareholder of parent
same rules apply for a merger between two subsidiaries if parent owns 90% of each
abandonment of merger
unless plan prohibits abandonment, may be abandoned at any time prior to filing the article of merger
can either happen in accordance with:
1)abandonment procedures set forth in the plan of merger, or
2)if the plan sets forth no procedure, manner determined by BoD
abandonment may constitute breach of contract
effects of merger
all rights, assets, and liabilities automatically vest in the surviving company
merger is not treated as a dissolution of the non-surviving firm
any change in ownership is not treated as an assignment of rights, assets, liabilities
merger with foreign entities
one+ domestic corps may merge with 1+ foreign
stock acquisition
a corp acquiring stock of another corp and thereby acquiring control of that firm without conducting a statutory merger
formats:
1)stock for stock exchange
2) stock purchase when purchasing corp buy stock on the public marker or through a tender offer process
asset purchase
a firm can purchase all, or substantially all of another corps assets
if for a relatively small sale- may act without shareholder approval
if transaction includes all or substantiall all, selling shareholder approval will be required
same rules as merger
when is a corp deemed to have kept significant continuing business activity
if it keeps business activity that represented:
at least 20% of total assets at the end of the most recently completed year, and
at least 20% of either income or revenue from continuing operations
liability when company buys all another firms assets
not always but look out for:
1)purchasing corp agrees to assume the liabilities
2)circumstances surrounding the transaction warrant a finding of a de facto merger or consolidation
3) transaction is fraud in fact
4) purchasing corp is merely a continuation of the selling corp
conversion into a different entity
A Virginia corporation may convert into a domestic limited liability company (LLC) and a domestic LLC may convert into a domestic corporation.
* Effective July 1, 2021:
A Virginia corporation may convert into a domestic or foreign eligible entity pursuant to a plan of conversion.
A domestic eligible entity may also convert to a domestic corporation.
approval procedures are same as merger
change of jurisdiction
allowed if other jurisdiction allows it
same requirements as merger
appraisal rights
a shareholder who objects to a merger/acquisition may be entitled to file to force the corp to buy her shares at a judicially determined fair price
who is entitled to appraisal rights
any shareholder entitled to vote on a fundamental change
exceptions:
1)market out exception: claims are not permitted if shareholder can sell his stock in a liquid and reliable market
2)for asset transfers, a shareholder is not entitled to appraisal rights unless the transfer is made to an interest person who within the past year:
i)held at least 20% of the voting power
ii)could elect more than 25% of the directors, or
iii) was a senior executive officer or director who receives a benefit not generally available to shareholders
notice for appraisal
corp must give advance notice to shareholders that will qualify
how to perfect appraisal rights
not vote in favor of the proposed corporate action, and
make a written demand for payment after the action is approved by other shareholders
remedies under appraisal rights
appraisal is an exclusive remedy meaning that the dissenting shareholder cannot challenge the corporate action for any reason except for fraud or illegality
how to do voluntary dissolution
if firm has not yet issued stock: may dissolve by signing a resolution of dissolution approved by a majority of the incorporators or initial directors
if has issued stock either:
1)having the board adopt a proposal to dissolve and obtaining shareholder approval, or
2)obtaining a 100% vote to dissolve by the outstanding shares entitled to vote
shareholder approval for voluntary dissolution
2/3 approval from each group can be more or less but must at least be a majority
corporation post dissolution
it continues to exist for a short time for the limited purpose of winding up and liquidating its business
corp will:
1)collect its assets
2)dispose of properties that will not be distributed to shareholders
3)discharge liabilities
4)distribute any remaining assets to shareholders according to their interest
5)conduct any other necessary act to wind up and liquidate
how can you revoke a dissolution
by submitting articles of revocation of dissolution with the commission
involuntary dissolution and who can do it
a legal action to involuntarily dissolve a corp
SCC
shareholder
creditor
involuntary dissolution by SCC
if the corp has:
1)abused its authority
2) failed to keep a resident agent
3) failed to file a required document, or
4) violated a fed employment law
involuntary dissolution by shareholder
if:
1)shareholders are deadlocked
2)directors are deadlocked and shareholders are unable to break it and irreparable injury to the corp is threatened
3)the acts of the directors are oppressive, illegal, or fraudulent, or
4) the corporate assets are being wasted
involuntary dissolution by creditor
when the claim has been reduced to an unsatisfied judgment and the corp is bankrupt
creditor rights post dissolution
board must pay creditors before making any shareholder distributions
how can a corp dispose itself of know creditors
by providing a notice of dissolution:
1)stating whether the claim is admitted or non admitted
2)providing a mailing address where claim may be sent
3)setting a deadline to confirm the claim
4) stating that any claim will be barred if confirmation not received by deadline, or if not admitted, not commenced by deadline
rights of unknown creditors post dissolution
may bring an action against a shareholder of the dissolved corp
creditor is entitled to the lower of the shareholders pro rata share or the amount received in liquidation
how long does a creditor have to bring a claim
SOL or 3 years after date of notice was delivered
close corporation
corp with only a few shareholder
allows a relaxed form of governance where shareholders often serve as both directors and officers
professional corporation
corp with a purpose that is limited by statute to rendering professional services
shareholder must be a member of applicable profession
shield an employee from liability arising from malpractice by other professionals in the corp but not own
foreign corp
authorized by law to issue shares under non VA law
generally may not transact business in VA unless it obtains a certificate of authority
VA distinguishes between incidental corporate activity from the transaction of business
corp can be sued or sue in VA without certificate
S corp
avoids double taxation by passing income and expenses through to the shareholders
Benefit Corp
a firm designed to promote one or more specific public benefits
corporate decisions dont have to maximize shareholder profits
must describe its public benefit efforts in its annual report
Nonstock corp
has members rather than shareholder but law parallels that of a stock corp
members are not entitled to distributions but have all other rights /restrictions of shareholders
Limited Liability company
a legally recognized business entity that combines pass through tax treatment with the limited liability of a corp
creation of an LLC
created by at least one person filing the article of organization with SCC
comes into existence at the time the commission issues a certificate of organization
purposes and powers of an LLC
may engage in any lawful business or purpose but may set out a more limited purpose in article
following powers:
to sue/be sued
purchase, transfer and encumber property
contract/lend money
elect/appoint officers, managers, agents
enter partnership agreements
indemnify
exercise any powers necessary
Key documents LLC
articles of organization
must include:
name of LLC- special word
its registered agents and office
business addresss
operating agreement: like bylaws
must be agreed to by all members
two main players in an LLC
members and managers
how does a person become a member of an LLC
by consent of a majority of managers in a manager managed or members in a member managed, ort by assignment/merger
LLC and agency
in a member managed, K formed for the LLC by a member with authority will be binding
in manager managed, acts of members will not be binding
LLC and voting
members will vote in proportion to their contribution to the LLC unless stated otherwise
need a majority vote
LLC managers
a person appointed by the members to manage the LLC
typically elected by the members
removal: either by articles/operating or with or without cause by majority vote of the members
LLC liability
in general, not personally liable to 3rd parties for obligation of the llc
exceptions
1) a member or manager liability will not be limited if so provided in the articles/operating
2)a member/manager liability will not be limited if she engages in willful misconduct or a knowing violation of crim law
3)if a member renders professional services in an LLC, the member may be personally liable for torts committed while rendering services
allocations of profits and distributions in an LLC
based on each members contribution to the LLC
dissolving an LLC
will dissolve upon the happening of an event stated in articles/operating or upon
unanimous written consent of the members, or
a judicial decree of dissolution or cancellation
LLC derivative action
a member may bring a derivative action against the LLC in the same manner that a shareholder may bring a derivative action against a corp
