Corporations Flashcards
Corporation vs. De Facto Corporation
A corporation is a unique organizational framework for a business, in which management is centralized, and shareholders enjoy limited liability. A corporation must file its articles of incorporation with the Secretary of State in order to be a valid corporation, and thus to enjoy this limited liability.
However, a corporation that does not file its articles of incorporation may nevertheless enjoy limited liability via de facto corporation. A de facto corporation :
1) attempted to incorporate in good faith;
2) is otherwise eligible to incorporate; and
3) subsequently acted like a corporation in good faith.
Veil Piercing–EMPHASIZE
Gen Rule–Shareholders are NOT personally liable for the debts of a corp, but only liable for the amt invested in the corp, except a ct may “pierce the veil” of limited liability to avoid fraud or unfairness.
Three factors in deciding whether to pierce the veil:
1) Alter Ego–The investor/shareholder has failed to observe any corp formalities b/t the person and the corp–i.e. treating the company just like itself (e.g. personal funds intermingled w/ company funds).
2) Under-capitalization–Failure to maintain funds sufficient to cover foreseeable liabilities; and
3) Fraud–Ps engaged in fraud or fraud-like behavior.
Cts more likely to pierce the veil in tort situations rather than contractual situations; more likely in small, closely held corps.
Issuance of Stock
Issuance of Stock:
–When a corporation sells or trades its stock to an investor, the transaction from the corporation’s perspective requires the issuance of stock. The corporation may issue such stock, provided the articles of incorporation authorize the issuance. RMBCA § 6.03(a).
- Authorization
In general, the issuance of stock must be authorized by the board of directors. RMBCA § 6.21(b). Many states also permit the shareholders to authorize the issuance of stock if the articles of incorporation so provide. RMBCA § 6.21(a). - Consideration
a. Types of consideration
The RMBCA removed restrictions on the types of consideration that can be accepted by a corporation in payment for its stock. Acceptable consideration includes money, tangible or intangible property, and services rendered to the corporation.
RMBCA § 6.21(b).
b. Payment of consideration
When the corporation receives consideration for stock, the stock is deemed fully paid and non-assessable. RMBCA§ 6.21(d).
A shareholder who fails to pay the consideration is liable to the corporation, and any issued stock may be canceled. If stock has not been fully paid, then the corporation or a creditor of the corporation may be able to recover theunpaid amount from the shareholder. RMBCA § 6.22(a).
c. Valuation of consideration
Under the RMBCA, the board of directors must merely determine that the consideration received for the stock is adequate. Moreover, once the board makes such a determination, the adequacy of the consideration is not subject to challenge. RMBCA § 6.21(c).
1) Par value stock
A corporation may, but is not required to, issue par value stock (min price it can sell stock). For such stock, the corporation is required to receive at least the value assigned to that stock (i.e., par value), which need not be its market value and which can even be a nominal amount.
Getting Money out of Corp
Bd can declare a dividend–only the bd of directors has power to authorize dividends.
Bd CANNOT declare dividends under two circumstances:
1) if the corp is insolvent; or
2) if by issuing the dividend the corp would become insolvent.
Directors who vote to auth unlawful dividend become personally liable J&S to the corp for the amt in excess of lawfull amt
Defense–director NOT liable if relied in GF on financial statements.
Shareholder Meetings
Annual Meeting mandatory–shareholders elect/re-elect bd of directors
Special Meeting–may be called to vote upon fund changes in life of corp (e.g. dissolution/merger, removal of director).
Notice–shareholders must be given notice of either type of meeting no fewer than 10 days and no more than 60 days before meeting; must include time/date/location (special meetings must also include purpose).
Insufficient notice–allows shareholder to challenge any actions at meeting; but notice waived by actually attending the meeting.
Record date–directors must fix the record date no more than 70 days before the meeting; ONLY shareholders who actually own shares on the record date entitled to vote.
Shareholder Meeting Alternatives
1) All shareholders may take any action w/o a meeting by unanimous written consent.
–only feasible for closely held corps
2) Proxy
–Allows large corps to deal w/ meeting logistics; authorizes others to vote shares in accordance w/ wishes of shareholder.
–To be legally effective a proxy must: 1) be in writing; 2) signed by the shareholder as of the record date; 3) sent to the secretary of corp; 4) state that it authorizes another to vote on the shareholder’s shares; and 5) cannot be valid for more than 11 months, unless otherwise specified.
Shareholder Voting
Quorum–for a vote to be effective a quorum–i.e. maj– of corp’s outstanding SHARES (NOT shareholders) must be rep at the meeting in person or via proxy.
Nec Vote–if quorum present a shareholder vote is effective if the votes cast (measured by # of outstanding shares) in favor of the proposal exceed the votes cast against proposal (don’t care about abstentions).
Director/Officers’ Fiduciary Duties–Duty of Care and Business Judgement Rule
Directors and officers owe a fiduciary DOC to corp to act in the best interests of the corp w/ reasonable diligence and prudence; and to act on a reasonably informed basis.
Business Judgement Rule–Directors and officers are protected from legal liability under the business judgement rule; i.e. in the absence of fraud, illegality, or self-dealing cts will not disturb GF business decisions.
*A typical devision protected by BJR includes whether to declare a dividend and the amt of any dividend
SOC–act w/ the care that a person in a like position would reasonably believe approp under similar circumstances; special skills expected to be used (i.e. accounting/legal background).
To overcome the BJR it MUST be shown that:
1) the director/officer did NOT act in GF (e.g. consciously allowing conduct that violates the law);
2) the director/officer was NOT informed to the extent that the director/officer reasonably believed was nec before making a decision;
3) the director/officer did NOT show objectivity or indp from the director’s relation to or control by another having material interest in the challenged conduct;
4) there was a sustained failure by the director/officer to devote attention to an ongoing oversight of the business and affairs of corp;
5) the director/officer failed to timely investigate a matter of signif material concern after being alerted in a manner that would have caused a reasonably attentive director to do so; or
6) the director/officer received a financial benefit to which he was not entitled.
Reliance Defense–a director/officer entitled to rely on the expertise of officers and other employees, outside experts, and committees of the board.
Director/Officers Fiduciary Duties–Duty of Loyalty–EMPHASIZE
Director/Officer may NOT receive an unfair benefit to the detriment of the corp w/o effective disclosure and ratification.
DOL usually dealing w/ 1) self-dealing transactions (also applied to family members of D) or 2) corp opportunity doctrine–i.e. usurping or stealing a corp opp thus preventing $ from coming into corp.
Corp Opportunity–need to disclose if: 1) corp has an existing interest or expectancy arising from an existing right (i.e. “interest or expectancy” test); or 2) the opp is w/in the corp’s current/prospective line of business (i.e. broader “line of business” test)
Insulation from Liability:
–Ratification–self-interested transaction may be upheld if it is disclosed and ratified by either a maj of disinterested directors OR a maj of disinterested shareholders;
–Fairness–also if a director/officer can demonstrate that the transaction was fair (e.g. it was a market-rate salary or the corp would never/could not pursue that opp) then ct will approve.
Board of Director Meetings
For a board of directors’ acts at a meeting to be valid–a quorum of directors must be present at the meeting (absent a higher level specified in the articles of incorp or bylaws); the assent of a maj of the directors present at the time the vote takes place is nec for bd approval.
Dividends–the power to auth a dividend rests w/ BOD; shareholder cannot sue corp to compel dividend unless shareholder can prove:
1) funds legally available for payment of dividend and
2) bad faith on part of BOD in their refusal to pay (usually this is not met, especially if facts show the BOD wanted to expand into a new line of business or invest the $ back into company–protected by BJR).
Shareholder Right of Inspection
A shareholder has a right to inspect and copy corp records upon 5 days’ written notice; shareholder must demonstrate a proper purpose before inspecting certain records–such as financial statements of corp, accounting records of corp, and excerpts from minutes of any meeting of BOD.
Shareholder Derivative Suit–EMPHASIZE
Shareholder sues on behalf of the corp for a harm suffered by the corp, and any recovery gen goes to corp.
Standing–to bring the suit reqs that P be a shareholder at time action is filed and when the act/omission occurred that caused the harm; P must make a written demand upon BOD 90 days before filing unless it would be futile.
Ultra Vires Actions
When a corp that has stated a narrow business purpose in its articles of incorp subseq engages in activities that fall outside of that stated purpose.
Trad Approach–ultra vires acts trad void/voidable.
Modern Rule–most corps are allowed to engage in any legit business purpose and are not able to void Ks merely based on a claim of ultra vires action (especially if closely held corp); protects the other P to the K from being abandoned if the corp determines that the K would not be profitable and then cites its articles of incorp as a reason to evade K obs.
Under Modern Approach Ultra Vires action can be challenged in only 3 situations–1) shareholder can file suit to enjoin action; 2) the corp can take action against a director/officer/or employee of the corp who engages in such action; and 3) the state can initiate a proceeding against the corp to enjoin action.
Actual/Implied/Apparent Auth
Actual auth–often defines by bylaws or set by BOD
Implied–officers have implied auth to perform tasks that are reasonably nec to carry out the officer’s duties as long as the matter is w/in scope of ord business.
Apparent–officers have apparent auth if the corp holds the officers out as having auth to bind the corp as to 3Ps.
Look for facts showing closely held corp–if so then directors may also be acting as officers so okay since less formal structure; otherwise if there are officers expressly vested w/ exclusive auth and none of the directors hold those officer positions, then look for facts showing directors engaging in unauth acts.
Failure to provide Notice and Obtain Shareholder Vote for Acquisition of Substantially All of Online’s Assets.
Certain major events in a corporation must be put to a shareholder vote. These include a merger or an acquisition of substantially all of the corporation’s assets. Before disposing of substantially all of a corporation’s assets, there are procedures that must take place:
–First the board must pass a resolution, either during a meeting or by written consent, agreeing to the acquisition. Appropriate notice must then be given to shareholders, informing them of the terms of the transaction and the date of the shareholder’s meeting for purpose of the vote. At the meeting, a quorum must be present, and a majority of shares voted must be in favor of the acquisition.
