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Corporations Flashcards

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1
Q

Corporations are

A

legal entities which have limited liability protection and are used to promote investment

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2
Q

3 groups involved in corporations

A

(1) Shareholders
(2) Directors
(3) Officers

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3
Q

A promotor is

A

someone who enters into contracts on behalf of a corporation (even before it exists)

personally liable for any K entered into and a fiduciary of the corporation (cannot make secret profits)

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4
Q

A novation is a

A

special agreement that alters default rule of promotor personal liability and shifts liability to the corporation

Requires agreement between promoter, corporation, and third party

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5
Q

Incorporators of a corporation must

A

sign and file articles of incorporation (and pay fee)

Must include:
(1) Name of corporation (including abbreviation of inc. or corp. or ltd)
(2) Agent of the corporation
(3) Names and addresses of the incorporators
(4) Duration of corporation (generally perpetual)
(5) Purpose of corporation (generally to engage in any lawful activity)
(6) Authorized shares (# and type of stock)

If breaches scope of purpose, may sue under Ultra Vires

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6
Q

Moment of incorporation (when limited liability begins) is when

A

Secretary of State accepts the fee and files articles of incorporation

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7
Q

Bylaws v. Articles of Inc.

A

bylaws are easier to amend (articles require shareholder voting)

Articles trump bylaws

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8
Q

De facto corporations are still treated as a corporation if

A

(1) organizers made a good faith effort to comply with the incorporation process, and
(2) organizers have no actual knowledge of a defect in corporate status

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9
Q

3 factors in deciding whether to pierce the corporate veil

A

(1) Alter ego (treating corp. like self, co-mingling funds)
(2) Undercapitalization
(3) Fraud

More common in TORT situations than contract ones

Look for siphoning corporate funds or stripping assets, disregarding formalities, self-dealing

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10
Q

Debt v. Equity

A

Creditors hold debt of corporation (only entitled to loan + interest)

Stockholders have equity (entitled to ALL value that remains in corporation after debts have been paid)

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11
Q

Classes of Stock include

A

preferred stock (take priority to common stock with regards to dividends and liquidation)

voting / non-voting stock

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12
Q

4 concepts of issuing stock

A

(1) Authorized shares (outlined in articles of incorporation)
(2) Issued shares (actually sold)
(3) Outstanding shares (still in possession of shareholders - typically only ones that vote)
(4) Treasury shares (bought back by corporation)

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13
Q

Par v. Watered stock

A

Par = minimum amount share may be sold for

Watered = sold below par value

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14
Q

Stock may be issued in exchange for

A

any valid consideration (as determined by board of directors)

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15
Q

Stock subscriptions prior to incorporation are

A

irrevocable for 6 months

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16
Q

Preemptive rights are

A

rights to purchase newly issued stock first to maintain ownership percentage

NOT the default rule but may be negotiated / added to the AoI

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17
Q

Dividends may be authorized by the

A

Board of Directors

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18
Q

Dividends may not be issued when

A

(1) company is insolvent
(2) issuing dividend would make company insolvent

If directors authorize unlawful dividend, they become personally, jointly and severally liable UNLESS done in good faith

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19
Q

“Participating” stock collects dividends as part of

A

the preferred class AND then collects among the common class

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20
Q

Closely Held Corporations limit sales of stock to

A

prevent outsiders from being involved and allow shareholders to retain control

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21
Q

Limitations in stock sales for closely held corporation must be

A

(1) Conspicuously noted
(2) Enforceable (lack of knowledge negates enforceability)
(3) Certain type of restriction

Types:
-Outright prohibition
-Request company’s consent
-Company has an option to buy
-Company has right of first refusal

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22
Q

Challenges to closely held corporation limitations on stock sales are on

A

the basis of restraint of alienation and the test applied is REASONABLENESS (e.g. to maintain the type of corp)

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23
Q

10b-5 federal cause of action for fraud requires

A

(1) Fraudulent or Deceptive conduct (untrue statement of material fact or failing to make comment to prevent statement already being made from being misleading)
(2) Materiality (important)
(3) Scienter (intentional or reckless)
(4) Harm (actual causal harm)
(5) Damages (out of pocket)

Note: TLDR Plaintiff relied on fraudulent misrepresentation by D done intentionally or recklessly regarding material fact and suffered loss

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24
Q

Short-swing profits prevent

A

corporate insiders (directors, officers, shareholders who hold more than 10% of ANY class of stock) from both buying and selling stock within 6 month period

ALL changes in ownership must be registered with SEC

NOTE: only applies to big companies (10 mil in assets and more than 500 shareholders)

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25
Q

Shareholders most important duty is to

A

elect board of directors and vote on fundamental changes to corporation

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26
Q

Meetings in a corporation may be either

A

(1) Annual (yearly to elect BoD)
(2) Special meeting for voting on any fundamental changes to corp (e.g. merger, dissolution)

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27
Q

Notice of a meeting requires

A

No fewer than 10 no more than 60 days before the meeting

Must include:
(1) Date
(2) Time
(3) Location
(4) Purpose (if special meeting)

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28
Q

The record date is

A

used to determine which shareholders are eligible to vote (must hold on record date)

Must be no more than 70 days before the meeting

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29
Q

Shareholders may make decisions without a meeting if

A

there’s unanimous written consent

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30
Q

Voting by proxy authorizes an individual to

A

vote shares in accordance with wishes of shareholder and must be

(1) in writing
(2) be signed by the shareholder as of the record date
(3) be sent to secretary of corporation
(4) authorize another to vote for shareholder’s shares
(5) cannot be valid for more than 11 months unless otherwise specified

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31
Q

A quorum is

A

required for a vote to be effective

a majority of OUTSTANDING shares (not shareholders) must be represented at the start of a meeting

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32
Q

In shareholder voting, a quorum requires

A

more votes in favor than against (abstentions are ignored)

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33
Q

Cumulative voting gives

A

shareholders a number of votes equal to the amount of shares owned x number of director positions being voted on

Must be permitted in AoI, used to vote for BoD

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34
Q

Shareholder inspection rights are limited to

A

a proper purpose related to shareholders financial interest in the company (not to harass corporate officers)

5 days notice, during normal business hours

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35
Q

Direct lawsuits are

A

lawsuits against a corporation brought by an individual shareholder in their own hame for personal damages (e.g. denied voting rights)

damages to to the individual

36
Q

Derivative lawsuits are

A

lawsuits against a corporation on behalf of the corporation

Claim is made in corporation’s name and recovery belongs to the corporation

37
Q

Derivative lawsuits require

A

(1) Standing
-contemporaneous stock ownership
-owned stock at the time of harm
-hold stock thru litigation
-fairly and adequately represent the interests of the company
(2) Demand requirement
-first demand BoD take action within 90 days and bring suit (exception: would be futile)

38
Q

Duties of a controlling shareholder

A

Duty to minority shareholders when
(1) Sale of stock to an outsider / looter (looter has done this before / reason to know that’s intention of purchaser)
(2) Controlling shareholder transacts with corporation (has own benefit)

39
Q

A controlling shareholder may be identified either by

A

50+1 percent or high degree of ownership (look to nature of the company)

40
Q

The Board of Directors governs

A

the business and affairs of the corporation

Appoint officers, oversee officers, make high level corporate decisions

typically 1 year, voted every year

41
Q

Removal and Replacement of BoD may be done

A

with or without cause

exception: staggered board (elected at offsetting years), may be removed only for cause if specified in AoI, different classes of shareholders may vote for specific directors

42
Q

If there’s a vacancy on the board or the board is expanded new directors may be chosen by

A

shareholders at special meeting or by the BoD

43
Q

Notice for directors must be given for

A

special meetings but not regular meetings (at least 2 days notice)

note: attendance waives notice unless objected to promptly

44
Q

Voting requirements for BoD

A

(1) Quorum (default = majority)
(2) Affirmative vote (majority present at meeting)
(3) OR Unanimous written consent

45
Q

Dissent (to avoid liability for directors) may be done by

A

(1) entering dissent into the meeting minutes
(2) filing written dissent before meeting is adjourned
(3) provide written dissent by certified or registered mail to corporation’s secretary immediately following adjournment

46
Q

Officers are selected by

A

the BoD and owe duties of care and loyalty

47
Q

Business Judgement Rule

A

in the absence of (1) fraud, (2) illegality, or (3) self-dealing, courts will not disturb the good-faith business decisions of directors

Generally must show D did not act in good faith, failure to be informed to the extent necessary, D had material interests and failed to timely deal with matters of material concern

48
Q

Duty of Care for officers

A

Act with care that a person in a like position would reasonably believe appropriate under similar circumstances (but special skills are obligated to be used)

Exception: reliance on expertise of other officers, employees, experts and committees of corporation

49
Q

Duty of loyalty for officers prevents the officers from receiving

A

an unfair benefit to the detriment of the corporation without effective disclosure and ratification

Disclosed and ratified by either (1) majority of disinterested shareholders, or (2) majority of disinterested directors OR court concluding that transaction was fair

50
Q

Ratification of self-dealing transactions does not

A

always win (may only shift burden)

51
Q

Required / Mandatory Indemnification

A

corporation always required to pay costs of defense if the director or officer successfully defends the case

52
Q

Prohibited indemnification

A

Corporation cannot indemnify a director or officer who is liable for receiving an improper benefit from the corporation or otherwise loses a lawsuit

53
Q

Permissive indemnification

A

Corporation may but is not required to indemnify director or officer for costs of suit if the director or officer
(1) Acted in good faith with no intent to harm corporation
(2) Had no reasonable cause to believe the conduct was illegal

54
Q

Fundamental changes of a corporation require

A

(1) Board to adopt resolution proposing the change
(2) Notice sent to shareholders of special meeting
(3) Majority vote of shareholders and directors

55
Q

Merger v. Consolidation

A

merger = combination of 2 corporations where one survives and assumes assets and liabilities of the other

consolidation = combination of 2 corporations to form new entity (assumes assets and liabilities of both corporations)

56
Q

Dissolution of a corporation may be

A

either voluntary or involuntary

involuntary = by disgruntled creditors showing debts aren’t being paid

by shareholders if assets are being wasted, or directors are acting fraudulently

57
Q

Appraisal rights of a shareholder may be authorized if

A

a shareholder doesn’t want to participate in an authorized merger, asset sale, share exchange, or amendment of AoI

58
Q

Procedural requirements for appraisal rights

A

(1) Shareholder must send written notice to corporation prior to vote of intent to dissent
(2) At the meeting shareholder must abstain or vote “no” (dissent AT the meeting)
(3) Shareholder must make prompt written demand for fair market value after the action has been approved

59
Q

If there’s a dispute about fair market value as to appraisal rights, a court may

A

appoint an expert appraiser to issue a binding appraisal of the value

60
Q

Characteristics of closely held corporations

A

(1) Shareholders are often also directors and officers
(2) Typically not publicly traded
(3) Relaxation of rigid rules of corporation

Can form voting agreements, default rule prohibiting preemptive rights may be relaxed

61
Q

An S corporation is really just

A

a corporation for state tax purposes

Pass thru taxation, limited to number of shareholders it may have

62
Q

Limited Liability Company (LLC) differs from S corp in that

A

there’s no limit to number of shareholders or residency/natural person requirement

63
Q

Characteristics of an LLC

A

file articles of organization and an operating agreement with the state

owners are called members

presumption that it’s managed by ALL members

Treated like a corporation

64
Q

Duty of loyalty for directors prevents

A

(1) Self dealing (unless one of 3 safe-harbor provided apply)
(2) Usurping corporate opportunity (must first prevent opportunity to the corporation)
(3) Competition with corporation

65
Q

Duty of care for directors

A

(1) Act as ordinarily prudent person
(2) Duty to investigate and ask questions

Note: CAN rely on reports and outside experts

66
Q

Order of distribution of assets during winding up

A

(1) Creditors of corporation
(2) Shareholders of corporation with preference
(3) Other remaining shareholders of stock

67
Q

Failure to incorporate properly results in

A

a partnership (absent creation of de facto corporation or corporation by estoppel)

68
Q

If a parent corporation causes its subsidiary to participate in a business transaction that prefers the parent at the expense of the subsidiary, it

A

can involve self-dealing and a breach of loyalty

69
Q

Under the “interest or expectancy” test (for usurping corporate opportunities), the key is whether

A

the corporation has an existing interest or an expectancy arising from an existing right in the opportunity

(Note: an expectancy can also exist when the corporation is actively seeking a similar opportunity)

70
Q

Under the broader “line of business” test, the key is whether

A

the opportunity is within the corporation’s current or prospective line of business

Note: look to how expansive corporation’s business is

71
Q

During the winding up process of an LLC, members must

A

notify creditors and distribute assets to satisfy outstanding debts otherwise may face personal liability

72
Q

In addition to proving either fraud, undercapitalization, or alter ego, to piece corporate veil a party must show

A

injustice /fraud if veil isn’t pierced

73
Q

If a shareholder successfully rebuts the business judgement rule, a director may still escape liability if they can show

A

the transaction was fair to the corporation (arguing substance as opposed to decision process)

74
Q

Business Judgement Rule is relevant to directors’ duty of

A

care

75
Q

A director’s duty of loyalty can be aptly summarized as

A

putting the corporations interests ahead of their own

76
Q

The ending of a corporation requires

A

filing articles of dissolution with Sec of State

77
Q

There is no mandatory buyout provision in the dissociation from

A

an LLC (must go to court to compel)

78
Q

A conflict-of-interest transaction, or “self-dealing,” is any transaction between a director and his corporation that

A

would normally require approval of the board of directors and that is of such financial significance to the director that it would reasonably be expected to influence the director’s vote on the transaction

79
Q

Whether a self-dealing transaction is fair to a corporation is assessed by looking at

A

(1) the substance of the transaction, and
(2) the procedure of the transaction

80
Q

With respect to the duty of care, directors have a duty to

A

act with the care that a person in a like position would reasonably believe appropriate under similar circumstances

Note: Must apply any specialized knowledge or training

Generally must rebut BJR first before arguing director violated duty of care

81
Q

Members of a member-managed LLC have broad authority

A

to bind the LLC similar to that of partners in a partnership (equal right to management)

82
Q

Dissolution of an LLC may occur based on

A

consent of all members, passage of 90 days without members, court order, or happening of a dissolution-causing event per the operating agreement

83
Q

A dissociating member of an LLC is entitled to receive

A

distributions authorized by the LLC but cannot force the LLC to prove a buyout of interest (as opposed to mandatory buyout of a partnership)

84
Q

Shareholder-approved bylaws can amend or repeal existing bylaw provisions, regardless of whether

A

the bylaw was initially approved by the shareholders or the board of directors

85
Q

A shareholder-approved bylaw dealing with director nominations may not

A

limit the board’s power to amend, add, or repeal to ensure an orderly nomination process.

(Directors may NOT repeal SH approved bylaws)

86
Q

A corporation’s bylaws may be amended by either

A

the BoD or SH so long as they do not conflict with state law or the Articles of Incorporation

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