Corporations Flashcards
What are the consequences of forming a corporation?
Internal Affairs Rule: The internal affairs of a corporation are governed by the law of the state of incorporation.
Entity Status: Upon formation, a corporation has entity status, meaning it’s a legal person.
Limited Liability: Shareholders are not personally liable for corporate debts.
What are the requirements for creating a de jure corporation?
(1) One or more persons who undertake to form the corporation, (2) the articles of incorporation, which must include (i) the name of the corporation, (ii) the name and address of each incorporator, (iii) a registered agent and the street address of the registered office, and (iv) information regarding the corporation’s stock, (3) delivery of the notarized articles to the secretary of state.
Note: If there is a conflict between the articles of incorporation and the bylaws, the articles will control.
What are the requirements for creating a de facto corporation?
(1) The party was unaware of the failure to form a de jure corporation, (2) the existence of a relevant incorporation statute, (3) the parties made a good faith attempt to comply with the statute, meaning the parties came close to forming a corporation, and (4) there has been some exercise of corporate privileges, meaning the parties were acting as thought they thought there was a corporation.
Note: Most states have abolished this doctrine.
What are the requirements for corporation by estoppel?
If the party was unaware of the failure to form a de jure corporation, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence. This only applies in contract cases.
Note: Most states have abolished this doctrine.
What are the rules for promoters?
A promoter is a person acting on behalf of a corporation not yet formed to procure commitments for capital and other instrumentalities that will be used once the corporation is formed. Promoters will breach their fiduciary duty if they secretly pursue personal gain at the expense of their fellow promoters. A corporation is not bound on contracts entered into by a promoter in the corporate name prior to incorporation. The corporation may become liable only if it expressly (express action) or impliedly (accepts benefits) adopts the promoter’s contract. The promoter will be personally liable on the contract even after the corporation is formed unless there is an express or implied novation.
What is the rule for foreign corporations?
Foreign corporations transacting business (i.e., the regular course of intrastate business activity) in a state must register as a foreign corporation with the secretary of state and pay the proper fees.
What are the rules for stock issuance?
Stock are equity securities that provide investors with an ownership interest in the corporation. Investors hold shares of stock. Those shares that have been sold are issued and outstanding. Shares that have been reacquired by the corporation through repurchase or redemption are authorized but unissued.
Subscriptions: Subscriptions are written offers to buy stock from a corporation. Pre-incorporation subscriptions are irrevocable for six months unless otherwise provided in the terms of the subscription agreement or unless all subscribers consent to revocation. Post-incorporation subscriptions are revocable until accepted by the corporation.
Consideration: Stock (or an option to buy stock) may be issued for any tangible or intangible benefit to the corporation. Under the traditional view, stock could not be issued for less than the stock’s stated par value–that is, the minimum issuance price. Directors and purchasers of stock are liable for watered stock, stock purchased for less than its par value. Under the MBCA, corporations may issue shares for whatever consideration the directors deem appropriate. The valuation is conclusive if it is made in good faith.
Preemptive Rights: A preemptive right is the right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money. This right must be stated in the articles of incorporation. The right does not exist for shares issued for consideration other than cash, within six months after incorporation, or without voting rights but having a distribution preference.
What are the requirements and roles of directors?
General Requirements: Directors are responsible for managing the business and affairs of the corporation. Directors must be adult natural persons. Each corporation must have one or more directors. Initial directors are named in the articles of incorporation or chosen by the incorporators and elected by shareholders thereafter.
Removal and Vacancies: Shareholders may remove a director with or without cause. Vacancies are filled by the board or shareholders.
Board Action: The board must act as a group and can do so (1) by unanimous agreement in writing or (2) at a meeting. An individual board member does not have the actual authority to make a unilateral decision absent one of these two methods.
Meeting Notice Requirements: No notice is required for regular meetings, but special meetings require at least two days’ written notice of the date, time, and place. Failure to give notice means the actions taken at the meeting are void. Notice can be waived by (1) writing or (2) by attending the meeting without objecting to the lack of notice.
Meeting Voting Requirements: A board meeting requires a quorum, meaning a majority of all directors unless the bylaws provide otherwise. Once a quorum is established, the board can take action by a majority vote of those present. However, directors cannot vote by proxy.
Role of Directors: Directors manages the corporation and delegate certain actions to committees. Directors CANNOT declare a distribution, fill a board vacancy, or recommend a fundamental change to shareholders, but it can recommend such actions to a committee.
What duties does a director owe to the corporation?
Duty of Loyalty: A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. Directors that engage in self-dealing breach their duty of loyalty unless the facts related to the interest are made known and (1) the action was approved by a majority (but at least two) of the disinterested directors, (2) it was approved by a majority of votes entitled to be cast by disinterested shareholders, or (3) the action was fair to the corporation under the circumstances at the time of the transaction. Even if the action is approved, some courts require a showing of fairness.
Example - Director Compensation: Unless the articles or bylaws provide otherwise, the board can set director compensation so long as it is reasonable and in good faith.
Example - Corporate Opportunity Doctrine: A director cannot divert a business opportunity a corporation would have an interest or expectancy in to himself unless the director gives the corporation a chance to reject the opportunity.
Duty of Care/Business Judgment Rule: A director must discharge their duties in good faith, with the care that a person in a like position would reasonably believe appropriate under the circumstances, and in a manner that the directors reasonably believe to be in the best interests of the corporation. Courts will not second guess director’s business decisions. The person challenging the director’s action has the burden of proving this standard is not met. The business judgment rule does not apply to duty of loyalty cases.
Directors may rely on information, opinions, reports, or statements if prepared or presented by (1) corporate officers or employees whom the director believes to be reliable and competent and (2) corporate outsiders as to matters that the director reasonably believes to be within the outsider’s professional competence.
Example - Nonfeasance: If the director engaged in nonfeasance in violation of his duty of care, a director is only liable for breaching this duty if the breach was the actual and proximate cause of the corporation’s loss.
Example - Misfeasance: If the director engaged in misfeasance in violation of his duty of care, a director will be liable for breaching this duty unless the business decision was made in good faith, was informed, had a rational basis (business judgment rule).
Duty to Disclose: Directors have a duty to disclose material corporate information to other members of the board.
Note: A corporation can make a loan to a director if it is reasonably expected to benefit the corporation.
What is the rule for director liability?
A director is liable for actions taken by the board unless the director dissents or abstains from the action in writing or the director was absent from the meeting.
An exculpatory clause will protect directors except to the extent that the director (1) received a benefit to which he was not entitled, (2) intentionally inflicted harm on the corporation or its shareholders, (3) approved unlawful distributions, or (4) intentionally committed a crime.
What are the rules for officers?
Power and Status: The power and status of agents is determined by agency law.
Duties: Officers owe a duties of care and loyalty and care to the corporation.
Selection and Removal: Officers are selected and removed by the board. Removal can be done with or without cause.
What are the rules for indemnification of directors, officers, and employees?
No Indemnification: A corporation cannot indemnify a director who is (1) held liable to the corporation or (2) held to have received an improper benefit.
Mandatory Indemnification: A corporation must indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director in their professional capacity for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding. In some states, the director or officer must win the entire case; in others, they are entitled to indemnification “to the extent” that they win the case.
Permissive Indemnification (Catch-All): A corporation may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director in the director’s professional capacity. if the director: (1) acted in good faith; and (2) believed that her conduct was in the best interests of the corporation (when the conduct at issue was within the director’s official capacity).
Court Ordered: A court may order indemnification if it is just under the circumstances.
What are the rules for close and professional corporations?
Close Corporations: Close corporations are those with few shareholders and non-publicly traded stock. Management powers can be vested in shareholders through shareholder management agreements. Shareholders owe a fiduciary duty to fellow shareholders.
Professional Corporations: Professional corporations are corporations incorporated by licensed professionals. The professionals are personally liable for their malpractice but are otherwise not personally liable.
What are the rules for shareholder liability of corporate debts?
Shareholders are generally not liable for corporate debts and acts, but they may be liable if the court pierces the corporate veil. This only applies to close corporations.
Standard: To pierce the corporate veil and hold the shareholder personally liable if (1) the shareholder abused the privilege of incorporating and (2) fairness requires holding them liable. Piercing the corporate veil is easier in tort cases than in contract cases.
Example - Alter Ego: The shareholder ignores corporate formalities such that the corporation is the “alter ego” or “mere instrumentality” of the shareholder AND some basic injustice results.
Example - Undercapitalization: The corporation is inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities.
What are the rules for a derivative suit?
A derivative suit is a suit where a shareholder is suing to enforce the corporation’s claim, not their own personal claim. If the shareholder prevails, the corporation is entitled to a monetary judgment and the shareholder is entitled to costs and attorneys’ fees.
Requirements to Bring a Derivative Suit: To commence and maintain a derivative proceeding, a (1) shareholder must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law from someone who did own stock at the time the claim arose, (2) the shareholder adequately represents the corporation’s interests, (3) the shareholder makes a written demand to the corporation, and (4) the corporation is joined as a defendant.
Dismissal: Dismissal of a derivative suit requires court approval. Dismissal will be granted if it is found to be in the corporation’s best interests based on an independent investigation.
