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Corporations Flashcards

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1
Q

Who is the board of directors in Corporations law?

A

The Board is the group in charge of management of the corporation.

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2
Q

Who are the shareholders in a Corporation?

A

The owners of the corporation.

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3
Q

Who are the officers in a Corporation?

A

The agents who carry out the corporation’s policy.

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4
Q

How is a Corporation formed?

A

Must have: (1) an incorporator (person); (2) articles of incorporation (paper); (3) deliver articles to the secretary of state with required fees (act).
- incorporator doesn’t need to be a citizen of the state.
- Corporate name needs to have something indicating that it’s a corp.

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5
Q

What is a de jure corporation?

A

A corporation that has been successfully formed (a legal corporation).

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6
Q

What are bylaws?

A

An internal document. Essentially an operating manual. The Articles of Incorporation win if there’s a conflict. The board can amend, repeal, etc.
- Not filed with the state.

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7
Q

What are the consequences of forming a corporation?

A

Internal Affairs Rule: Corporation is governed by the law of the state that it’s incorporated in.
Entity Status: Corporation treated as a separate entity from its owners.
Double Taxation: Corp pays income tax and SHs pay for dividends.
Limited Liability: SHs not individually liable–only liable for their stock value.

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8
Q

What is an S Corporation?

A

Corps that have pass-through taxation.

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9
Q

What is the Doctrine of Defective Incorporation?

A

If the incorporators thought they formed a corporation, but they failed to do so, they’d be personally liable for business debts.
But two doctrines may still allow the incorporators to escape liability: (1) de facto corporation and (2) corporation by estoppel. In other words, the veil of protection may be applied where a de jure corporation has not been formed. One important characteristic of both of these doctrines is that anyone asserting either doctrine must be unaware of the failure to form a de jure corporation.

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10
Q

What are the requirements for a De Facto Corporation?

A

(1) A relevant incorporation statute; (2) good faith attempt to comply with the statute; (3) acting like a corporation.
- Only exception is that the state can come after them still.
- Abolished in many states.

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11
Q

What are the requirements for a corporation by estoppel?

A

This is not a de jure corporation but is treated that way for people who treated the business like a corporation.
- Only applies for contracts.
- Abolished in many states.

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12
Q

What liability applies for pre-incorporation contracts?

A
  • Corporations are only liable for contracts that it adopts (express or implied–accepting a benefit of the contract).
  • Unless the contract says otherwise, the promoter is liable until novation.
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13
Q

What is a foreign corporation? What must it do to transact business in another state?

A

A corporation formed anywhere other than the state. If a foreign corporation is transacting business in the state, it must qualify and pay prescribed fees.
- Transacting business is doing intrastate business.

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14
Q

What are debt securities? What are they used for?

A

These are called bonds. Used to raise money for the corp. The holder is a creditor, not an owner.

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15
Q

What are equity securities? What are they used for?

A

These are called stocks. Used to raise money. The holder is an owner, not a creditor.

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16
Q

What is an Issuance?

A

When the corporation sells its own stock.

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17
Q

What are subscriptions?

A

Written offers to buy stock from a corporation.

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18
Q

Are corporation pre-formation subscriptions revocable?

A

These are irrevocable for six months, absent an exception.

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19
Q

Are corporation post-formation subscriptions revocable?

A

Yes, can revoke anytime until it’s accepted by the corporation. Both obligated once the board accepts the offer.

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20
Q

What form of consideration is needed in return for a corporation’s issuance of stock?

A

Any tangible or intangible property or benefit to the corporation.

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21
Q

What is the minimum amount of consideration needed in return for a corporation’s issuance of stock?

A

Par (the minimum issuance price). If there’s no par, they can issue for any price that it sets.

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22
Q

What is treasury stock?

A

Stock that the corp has issued and then reacquired.

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23
Q

Is a board’s valuation of issued stock conclusive?

A

Yes, if the valuation was made in good faith.

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24
Q

What is a Preemptive right?

A

The right of an existing shareholder to maintain a [percentage of ownership by buying stock if there is a new issuance.
- The issuance must be for money if preemptive rights are to apply.

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25
Q

If a corp’s articles are silent, do the SHs have Preemptive Rights as a default?

A

NO.

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26
Q

What are the requirements for corp directors?

A

(1) They must be adult natural persons; (2) there must be one or more; (3) the initial directors must be named in the articles or elected by the incorporators (and the SHs elect thereafter).

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27
Q

On what basis can SHs hire or fire directors?

A

With or without cause.
- If it’s a staggered board, only with cause!

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28
Q

If there’s a vacancy in a board of directors, who decides how to fill that vacancy?

A

Either the board or the SHs.
- If the SHs created the vacancy, then they generally must select the replacement.

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29
Q

Are individual directors agents of the corp?

A

NO! They must act as a group.

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30
Q

How does a board of directors act?

A

(1) A unanimous agreement in writing or (2) at a meeting.

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31
Q

How is notice of board meetings given?

A

Must notify of the date, time, and place.
- Regular Meeting: No notice.
- Special Meeting: Notice is required.

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32
Q

Can directors give proxies or enter into voting agreements?

A

NOOOOOOOOOO!!!!!!!!!!!
- They owe non-delegable fiduciary duties.

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33
Q

Can shareholder vote by proxy or enter into voting agreements?

A

YES!

34
Q

What are the requirements for a Board to meet and to vote?

A

A quorum is needed (a majority of all the directors on the board) to initially meet. A majority of those present is then required to pass a resolution.

35
Q

What is a Broken Quorum?

A

There were enough people to meet initially but then people left the meeting such that there aren’t enough people anymore.

36
Q

What is the role of the board of directors? What can be delegated to committees by the board?

A

To manage the corporation. While the board can delegate actions to a committee, a committee may not take the following actions: (1) declare a distribution; (2) fill a board vacancy; (3) recommend a fundamental change to the SHs. They can’t do these thing, BUT, they can recommend these things to the board.

37
Q

What fiduciary duties are owed by the board?

A

The board owes the corporation fiduciary duties of loyalty and care.
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 (loyalty). She must also use the care that a reasonable person would believe to be appropriate under the circumstances (care).
- ALWAYS STATE THE DUTIES ABOVE IN YOUR ANSWER.

38
Q

In duty of care cases in corporate law, who is the burden on?

A

The burden is on the plaintiff.

39
Q

When is a defendant liable for a non-feasance breach of the duty of care?

A

A director/officer is liable for breaches of the duty of care when the plaintiff can show that the company lost money as a result (it harmed the corporation).

40
Q

When the board makes a decision that hurts the business, when are they liable?

A

Under the Business Judgment Rule, a court will not second guess business decisions that were made in good faith, were informed, and had a rational basis.
- Presumption in favor of officer/director.

41
Q

What is the Business Judgment Rule?

A

A director’s decision may not be challenged if the director (1) acted in good faith; (2) in a manner reasonably believed to be in the best interest of the corporation; and (3) with the care that a reasonable person would exercise in a like position.

42
Q

Does the Business Judgment Rule apply in duty of loyalty cases?

A

NO.

43
Q

What standard is applied when an officer/director engages in self-dealing?

A

The transaction will be set aside or the director will be liable for damages unless the director shows (1) that the deal was fair to the corporation when it was entered into OR (2) that her interest and the relevant/material facts were disclosed or known and the deal was approved by either [1] a majority of the disinterested directors OR [2] a majority of the disinterested shares.
- NOTE: some courts still require a showing of fairness even if one of the above groups approves the deal.

44
Q

What is the Corporate Opportunity Doctrine? What are corporate opportunities?

A

A director cannot usurp a corporate opportunity unless (1) he has first told the board and (2) they have rejected the opportunity.
- A corporate opportunity is something that the company has an interest or expectancy in or that the guy found in his time at the business (think generally).

45
Q

Can a corporation make a loan to a director?

A

Yes, if it is reasonably expected to benefit the corporation.
- EX: loan so that one of them can attend business school.

46
Q

What position is a silent director deemed to take on board actions?

A

A director is presumed to concur with the board action unless the dissent/abstention is noted in writing in the corp’s records.

47
Q

How are officers selected and removed? Who determines their compensation?

A

They’re selected and removed by the board. The board also determines their compensation.

48
Q

When can a director/officer receive indemnification from the corporation for litigation expenses?

A
  • Corp cannot indemnify if D/O held liable to the corp or there’s an improper benefit.
  • Corp must indemnify if the D/O is successful in defending on merits or otherwise.
  • Corp may indemnify if D/O shows that they acted in good faith with the reasonable belief that they acted in the business’s best interest. Settlements are included in this (since it’s a catchall).
49
Q

How can SHs run a corporation directly?

A

In a Closely Held (Close) Corporation.

50
Q

What is a Closely Held Corporation?

A
  • Small number of SHs
  • Stock not publicly traded
  • SHs can manage directly (or appoint officers)
51
Q

What fiduciary duties apply in Closely Held Corporations?

A

Along with the normal duties, SHs owe duties to other SHs (because it’s similar to a partnership). They owe a duty of utmost good faith.

52
Q

What is a Professional Corporation?

A

A corp where the directors, officers, and SHs must be licensed professionals.

53
Q

What is Piercing the Corporate Veil? What corporations can it be applied to?

A

A doctrine that allows SHs to be sued for debts of the corporation.
- Available only in close corporations.

54
Q

When will courts pierce the corporate veil?

A
  • SHs have abused the privilege of incorporating.
  • Fairness requires holding them liable.
55
Q

What are the classic situations for piercing the corporation veil?

A
  • Alter Ego: Commingling personal and corporate funds and treating the corporate assets as his own.
  • Undercapitalization: The owner of the corporation doesn’t have sufficient capital for its business when formed (EX: no insurance). Failing to invest enough to cover prospective issues.
56
Q

Are courts more likely to pierce the corporate veil in tort or contract cases?

A

Courts are usually more willing to pierce a corporate veil in a tort case than a contract case.

57
Q

What are derivative suits? What kind of suit is always derivative?

A

A SH sues to enforce a corp’s claim.
- Suing for breaches of the duties of loyalty or duty are always derivative.

58
Q

What are direct suits?

A

A SH sues to enforce their own claim (not the corporations).

59
Q

Who gets the money from a successful derivative suit?

A
  • The money from a judgment goes to the corp.
  • P recovers costs and fees only.
60
Q

What are the requirements for bringing a stockholder derivative suit?

A

(1) Stock ownership when the claim arose and throughout the suit; (2) adequate representation of the corp’s interest; and (3) a written demand that the corp bring a suit (in some states, don’t have to if demand would be futile).

61
Q

What is the procedure for a court to dismiss a derivative suit after the demand stage?

A

First, an independent investigation will conclude that the suit is not in the corp’s best interest (Special Litigation Committee).
If a court finds that (1) those recommending are truly independent and (2) they made a reasonable investigation, then most courts will dismiss.

62
Q

What is Authorized Stock?

A

The max number of shares that a corp can sell.

63
Q

What is outstanding stock?

A

Shares that the corp has issued and not reacquired.

64
Q

What is the lifespan of a proxy for stock voting purposes?

A

Unless it says otherwise, 11 months.

65
Q

What is a Voting Trust?

A

A trust that allows shares to be voted together.
Requirements: (1) written trust agreement controlling how the shares will be voted; (2) give a copy of the agreement to the corp; (3) transfer legal title to voting trustee; (4) give original SHs trust certificates.

66
Q

What is a Voting (Pooling ) Agreement? What are its requirements?

A

An agreement for voting corp shares together.
Requirements: In writing and signed.
- PROBLEM: In some states, not enforceable (increasingly enforceable though).

67
Q

What are cumulative voting and straight voting?

A
  • Cumulative Voting: One election is held for all of the directors (this method gives small SHs a better chance of electing someone to the board). Each SH has a number of votes equal to the number of their shares X the number of directors to be elected.
  • Straight Voting: A separate election is held for each director being elected.
68
Q

If articles of incorporation are silent, what is the default for voting rules (straight vs cumulative)?

A

It would be straight voting (not cumulative).

69
Q

What does preferred stock mean?

A

It means that dividends are paid to these shares first.

70
Q

What does Insolvent mean?

A

Unable to pay one’s debts as they come due OR total assets < total liabilities.

71
Q

When is a corp unable to make distributions?

A

A corp cannot make any distributions if it is insolvent or if the distribution would render it insolvent.

72
Q

What liability attaches (and to whom) in the case of improper distributions?

A

The directors are jointly and severally liable for improper distributions.
- EXCEPTION: Good faith reliance.

73
Q

What are the fundamental corporate change requirements?

A

(1) Board action; (2) written notice to SHs; (3) SH approval; and (4) deliver document to the secretary of state.

74
Q

What are considered fundamental corporate changes?

A
  • Amending the articles of incorporation
  • Mergers or Consolidations (combining corporations)
  • Transfer of all or substantially all assets (fundamental for the selling corp only–not buyer)
  • CONVERSION: A corp converts into another business entity.
75
Q

How is winding up carried out for corporations?

A
  • Provide written notice to known creditors and in a newspaper in the county of the PPB.
  • Gather cash
  • Liquidate assets
  • Pay creditors
  • Distribute remaining sums to SHs.
76
Q

Can treasury shares be voted by the directors?

A

No, treasury shares cannot be voted.

77
Q

When there is an issue of shares changing hands around the time of a vote, does the seller or buyer have power over how the shares are voted?

A

Only shareholders of record (recognized as the owner of a company’s stock or security and is listed as such in the company’s shareholder register) ON THE RECORD DATE (cutoff established by the corp for voting purposes) may vote at a shareholder meeting.

78
Q

How may voting proxies be revoked?

A

Absent the proxy saying that it’s irrevocable and being coupled with an interest (essentially paying for right to be proxy), a proxy may be revoked by a subsequent instrument or by the shareholder showing up to vote in person.

79
Q

When may an exculpatory clause relieve directors of liability?

A

A corporation’s articles of incorporation may limit or eliminate director’s personal liability for money damages to the SHs or corporation for actions taken, except to the extent that the director received a benefit to which he was not entitled, intentionally inflicted harm on the corp or SHs, approved unlawful distributions, or intentionally committed a crime.

80
Q

May directors rely solely on the opinions of experts and corporate insiders?

A

Corporate law generally allows directors to rely on the opinions of experts and corporate insiders. However, they may not rely on those opinions it is unreasonable to do so (EX: when the experts or insiders have a personal interest in the transaction).

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