Corporations Flashcards
Key players
Shareholders
board of directors
officers
Shareholders
Owners of corp
no fiduciary duties
no direct control in management
Board of directors
In charge of management
adult natural persons
do not have to be shareholders
must have one or more
initial - name in articles otherwise elected at organizational meeting
- after that, shareholders elect annually at shareholder’s meeting
Officers
Agents of the corporation appointed to carry out the corp’s policies
delegated day to day management by BoD
Formation
De jure - in accordance with law
De facto - law not followed
estoppel - law not followed
De jure
Need person, paper act
person - incorporator
- execute and deliver articles of incorp to secretary of state
- need not be a citizen of the state of incorp
Paper - articles
- name or corp
- name and address of incorporators
- registered agent and registered office
- corporate stock information
act - corporate existence begins on filing
- notarized articles delivered to secretary of state and pay fees
Business purpose
Any lawful purpose if not restricted
ultra vires if outside of scop of business purpose
cl - void
mbca - not void
- shareholder can sue to enjoin
- corp can sue officer or director for damages
- state can bring action to dissolve corp
Internal affairs doctrine
internal affairs of the corp are governed by the law of the state of incorporation
De facto corporation
Relevant incorporation statute - all states have one
parties made a good faith, colorable attempt to comply
some exercise of corporate privileges - acting as a corp
must be unaware of failure to form a de jure corp
- business is treated as a corp except in an action by the state
applies equally on all contract and tort claims
abolished in most stated but still apply in essay
Corporation by estoppel
Persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence
only in contract cases
case by case basis
abolished in most stated but still apply in essay
Pre incorporation contracts
Promoters entering into contracts
to each other and corp
- promoters are fiduciaries to each other and to corp
- liable for fraud and may be liable for profit of selling property to corp
to third parties
- corp not bound by contracts because did not exist unless adopt - express or accepts benefit
- promoter personally liable unless novation
- if agreement expressly relieves promoter of liability - not a contract, only an revocable offer to corp when formed
Foreign corporations
Corporations from different state
must register and pay fee to transact in the state
transact - regular course of intrastate business activity - not enough to be sporadic or own property in the state
Bond
debt security
holder is a creditor
if unsecured - called a debenture
stock
equity
Ownership interest
authorized share - shares they can distribute
issued and outstanding - sold
authorized and unissued - reacquired b corp - treasury
subscription - written offers to buy stock from corp
- preincorp subscriptions are irrevocable for 6 months unless agreement states otherwise or all subscribers consent to revocation
- post incorp - revocable until accepted
Consideration for stcok
Any tangible or intangible property or benefit to the corp including services already performed or future services
Par value
minimum issue price
mbca approach - no mar par value - board’s valuation is conclusive if made in good faith
Watered stock
par value stock issued for less than par value
directors liable if knowingly authorized issuance at less than par
person buying is liable if on notice of pay value
transferred to third party- not liable if good faith
can sell to third party for less than par because not an issuance - issuance is only when corporation sells
Preemptive right
right of an existing shareholder of common stock to maintain percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY
Right must be provided for in articles of incorp
limitations - no right if shares issued
- for consideration other than cash
- within 6 months after incorp
- without voting rights but having a distribution preference
removal of directors
shareholders can remove with or without cause
if staggered board - only with cause
Vacancies on board
Board or shareholders select person who fills in
if shareholders create the vacancy, only shareholders can replace
Board action
can only act as a group
- unanimous agreement in writing
- at a meeting which satisfies quorum and voting
acn ratify defective corporate actions
Board meetings
regular meetings - no notice
special meetings - 2 days written notice of date, time and place
- failure to give notice - actions voidable or void unless directors who were not notified waived in writing or by attending and not objecting
- no proxies
quorum
- majority of directors but no fewer than 1/3 if changed in bylaws
0 can be lost if people elave
voting
- marjoity of those present
Committees
board can create and appoint members of the board to serve
can act for the board by board must supervise
cannot declare distribution, fill a board vacancy, or recommend a fundamental change to shareholders
Standard of directors duties
“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. She must also use the care that a person in like position would reasonably believe appropriate under the circumstances.”
- duty of loyalty
- duty of care
Duty of care
burden on challenger to prove breach
nonfeasance
- director does nothing - lazy director
- liable only if breach causes a loss to the corporation - difficult to show that nonaction caused a loss
misfeasance
- board makes a decision that hurts the business
- causation is clear because participated in decision
Business judgment rule
- not liable for decisions that in hindsight were poor
- presumption that when the board took an act it did appropriate homework
- will not second guess decisions made in good faith, informed, and rational basis
can rely on reports, opinions, statements
Duty of loyalty
conflicts of interest - Business judgment rule does not apply
burden on defendant to prove no breach
cannot compete
transaction between corporation and
- one of the directors
- director’s close relative
- a business of the director
not a breach if
- approved by majority of disinterested directors or majority of disinterested shares after disclosure of all material facts
- it was fair to the corporation
even if approved - can still be breach if waste of corporate assets - may also need to show fairness
Fairness
adequacy of consideration
corp need to enter transaction
financial position of the corp
available alternatives
Director compensation
Directors can set
must be reasonable and in good faith
otherwise breach of loyalty
Usurpation of corporate opportunity
breach of loyalty
must first give corporation an opportunity to act
corp must have an interest or expectancy or in business line
lack of financial ability not a defense
remedies
- constructive trust
- compel transfer at price she paid
- profit if sold
Duty to disclose
material corporate info to other members of the board
Loans
Corp can make a loan to director if reasonable expected to benefit the corp
What directors are liable
Director presumed to concur with board action unless her dissent or abstention is noted in writing on the corp records
- the minutes
- delivered to presiding officer at the meeting
- written dissent immediately after meeting
cannot dissent if voted for resolution in meeting
not liable if absent from the board meeting
Officers roles and duties
Agents of the corporation
trad - needed president, secretary, treasurer
now - do not need any particular
- one person can serve more than one office simultaneously
duties - same care and loyalty as directors
Officer selections and removal
By board who also sets compensation
- with or without cause
-if breach of contract- right to damages
shareholders only hire and fire directors, not officers
Indemnification of officers, directors, employees
No indemnification
- held liable to the corp
- received improper benefits
Mandatory unless limited by articles
- successful in defending a proceeding on the merits
permissive - and catch all
- unsuccessfully defending and director acted in good faith and believed actions were in the best interest of the corp
Determination of indemnification
Disinterested majority of board
if no disinterested quorum, majority of a disinterested committee or independent legal counsel or shareholders
Elimination of liability to corporation for damages
can not eliminate duty of loyalty, can for duty of care
Close corporation
shareholders run close corp
- can be managers or can elect board
few shareholders and stock is not publicly traded
Shareholder management agreement
Close corps
- set up alternative management
to set up
- in articles and approved by all shareholders
- unanimous written shareholder agreement
whoever is in management owes a fiduciariy duty
If no shareholder management agreement set up - no power in management
Close corp - special duties
Fiduciary duty on shareholders owed to other shareholders
controlling shareholders to minority shareholders
- cannot use power to benefit at expense of minority
- disclose material info to minority
oppression of minority shareholders
- can sue the controlling shareholders who oppress them for breach of duty
Professional corporation
Licensed professionals can incorporated - must have PC of PA in name
Articles must state purpose is to practice particular profession
Directors, officers, shareholders must be licensed professionals
employees can be non-professionals
Piercing the corporate veil
only in close corporations
- shareholder might become personally liable
- to void fraud or unfairness
Requirements
- shareholders must have abused the privilege of incorporating
- fairness must require holding them liable
Elements justifying
- alter ego - shareholders ignore corporate formalities and treat the corp as a mere instrumentality/alter ego of the shareholders - treating corp assets as own, commingling money
- undercapitalization - at time of formation, not enough unencumbered capital to reasonably cover prospective liabilities
- Fraud, avoidance of existing obligations, evasion of statutory provisions
Piercing corporate veil - who is liable and for what
only the shareholders who were active in the operation
easier in a tort claim than a contract claim
Derivative suit
shareholder suing to enforce the corporations claim, not own personal claim
money from judgment goes to the corporation
Standing for derivative suit
Shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law (inheritance or divorce) from someone who did own stock at the time the claim arose
Derivative suit procedures
Shareholder must made a written demand on corporation to take action, wait 90 days to sue - unless demand would be futile
join corporation as defendant
dismissal and settlement requires court approval
- reasonable independent investigation found not in the best interest of the corp
Burden of proof
- burden on shareholder to prove decision not made in good faith
- burden on directors if personal interest in controversy that it was made in good faith
Stock
Authorized - number of shares corporation may issue - set in articles
Issued - number corp has sold
Outstanding - shares issued but not reacquired
Shareholder voting
Shareholders of record on the record date may vote at the meeting
record date fixed by BoD - cannot be more than 70 days before meeting
exceptions
- treasury stock - reacquire stock before record date - no one votes on the stock
- death of shareholder after record date - executor votes
Voting by proxy - shareholder
Requirements
- writing
- signed by record shareholders
- directed to secretary of corp
- authorizing another to vote the shares
proxy only good for 11 months unless it says otherwise
revocation
- revoke by attending meeting, in writing to corp secretary, or by subsequent appointment of another proxy
- irrevocable if proxy coupled with an interest other than voting or given security and states that it is irrevocable
Pool voting power
Voting trust
Voting agreement
Voting trust
Written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee who votes the shares
usually only valid for 10 years
requirements
- written trust agreement
- copy of the agreement given to corp
- legal title to shares transferred to voting trustee
- original shareholders receive trust certificates and retain all shareholder rights except voting
Voting agreement
Writing and signed
- no time limit
- does not need to be filed with corp
specifically enforceable
Shareholder meetings
Can take action in meeting or unanimous written consent
annual meeting
- if not held within 6 months of the end of the fiscal year or 15 months after last annual, whichever is earlier - can petition court to order one
- usually to elect directors
special meeting
- may be called by BoD, president, holders of atleast 10% of outstanding shares, or anyone authorized in articles or bylaws
Notice
- in writing 10-60 days before meeting
- can be waived
- date, time, place
- if special meeting - purpose because cannot do anything else but the purpose at the meeting
- if no notice - actions may be void unless waiver - express or implied
How and what do Shareholders vote
What do they vote
- elect directors - plurality voite
- remove directors - majority entitled to vote but increasingly majority that actually voted
- fundamental corporate changes - majority entitled to vote but increasingly majority that actually voted
- other things board asks them to vote on - majority that actually voted
(follow traditional voting numbers)
Quorum - based on number of shares not shareholders
- majority of outstanding shares entitled to vote
- not lost if people leave meeting
Cumulative voting
only if in the articles
- dont vote for each seat individually like straight voting
- one large election and top to finishers are elected
- multiply number of shares times number of directors to be elected to determine voting power and allocate shares to candidates
Stock restrictions
Can restrict transfers if not an undue restrain on alienation
- rights of first refusal are valid
Cannot enforce restrictions on a third party purchaser if no notice of restriction
Shareholder inspection rights
Noncontroversial things - unqualified rights
- written demand at least 5 days in advance
Controversial things - qualified right
- must state proper purpose reasonably related to person’s interest as a shareholder
- 5 day written notice
Distributions
No right - solely within directors discretion
can compel if there is an abuse of discretion
record shareholder as of the record date will receive the dividend
Funds for distribution
Cannot made distribution if insolvent or the distribution will make them insolvent
- corp would not be able to pay its debt as it becomes due
- the corp’s total assets would be less than the total liabilities plus the amount need if the corp were to dissolve at the time of distribution to satisfy preferential rights
Unlawful distribution liability
Directors jointly and severally liable unless good faith
shareholder if they knew the distribution was improper when receiving it
Fundamental corporate cahanges
Amending articles
merging or consolidating
transferring substantially all assets
converting to another form of business
dissolving
- board action adopting resolution
- board submits proposal to shareholders with written notice
- shareholder approval
Right of appraisal
Dissenting shareholder to fundamental change can force corp to buy their stock at fair value - only if stock not publicly traded or have less than 2000 shareholders with stock valued less than 20 million
merging or consolidating
transferring substantially all assets
converting to another form of business
not amending or dissolving
Merger and consolidation
Merger - two corps combine and one corp survives
consolidation - two corp combine and form a new entity
need shareholder approval from both corps
- exception to surviving corp in merger if no significant change (articles dont change, shares dont change, voting power does not change much)
Surviving corp has all liabilities of constituents - successor liability
Shot form merger
No shareholder approval required
Parent corp owning at least 90% of outstanding shares of subsidiary merged the subsidiary into itself
Transfer of all or substantially all of assets
at least 75% of assets
fundamental change for seller not buyer
no successor liability unless buyer is mere continuation of seller - same management, shareholder - de facto merger
Fundamental changes that require filings with secretary of state
Amendments to articles
mergers and consolidations
conversion
Dissolution
Voluntary
- incorporators and initial directors before shares have been issued and business had commenced
- corporate act - board and shareholder approval
- can revoke
involuntary
- attorney general - fraud in obtaining articles or abusing authority
- shareholder - director abuse, waste of assets, misconduct, director deadlock, failed to elect directors for 2 annual meetings in a row
- creditors if have judgment and insolvent
- administrative - can cure within 2 years to be reinstated
