Corporations Flashcards
Basic players in the corporation
Shareholders/stockholders: owners of the corp.
Board of directors (the board): in charge of management. Elected by the shareholders.
Officers: agent appointed by the board who carry out corporation’s policy.
Forming a corporation
Requirements to form a corporation:
(1) Person: incorporator; executes the articles and delivers them to the Secretary of State. May be a person or an entity, don’t need to be a citizen of the state of incorporation.
(2) Paper: Articles of Incorporation. The name of the corp must include one of these magic words or an abbreviation: corporation, company, incorporated, or limited. Must have name and address of the incorporator. Must have the registered agent (legal rep permitted to receive service of process). Must have info re: your stock, which starts with authorized stock (max # of stock that corp can sell).
-Initial directors MAY be included.
(3) Act: deliver articles to Secretary of State with required fees.
Organizing a corp:
-If initial directors named in the articles, those directors will hold the organizational meeting. If not named in the articles, then the incorporators can hold the meeting, and there they’ll elect the initial directors who take over management.
-At the meeting: (1) appoint offers and (2) adopt initial bylaws [internal doc functioning like an operating manual for corp], but not filed with state. Articles govern if conflict with bylaws. Board of shareholders can amend, repeal, and adopt.
B-corp (for benefit corporation): for-profit but also formed to pursue some benefit to a broader social policy cause. Articles must say it’s a benefit corp.
Consequences of forming a corp
-Internal affairs rule: internal affairs are governed by the law of the state of incorporation.
-Entity status: corp is a legal person – can sue, can be sued, can invest, can make contributions to charity.
-Double taxation. But S corps do not pay income at the income level (unlike C corps). S corps have no more than 100 shareholders, they all have to be human (not entities), and only one class of stock that’s not publicly traded.
-Limited liability. Corp itself is liable for the business debts. What if you tried to form a corp but unknowingly failed (and thus only have a partnership)? Partners can escape liability if:
—-(i) de facto corp: relevant incorporation statute; show that parties may good faith attempt to comply with the statute; exercise of corporate privileges/act like a corp
—(ii) corp by estoppel: not a de jure corp, but treated that way for people who treated the business like a corp. Applies only in contract cases, NOT tort.
-Liability for pre-incorporation contracts made by a promoter: corp liable only if it adopts the contract, by (i) express adoption by the board or (ii) implied adoption where a corp accepts the benefit of the contract; Promoter liable until novation (i.e. promoter gets replaced under the contract) or explicity exculpated under the agreement b/w the parties. Promoter = person who procures commitments for capital and instrumentalities on behalf of a corp that will be formed in the future. Generally, personally liable on all such contracts.
Foreign corps (i.e. operating in any state outside its state of incorporation): if transacting business [regular course of intrastate business] in state, must qualify (via registration) and pay prescribed fees.
Exculpatory provisions
A corp’s Articles of Incorporation may limit or eliminate directors’ personal liability for money damages to the shareholders or corp for action taken, except to the extent that:
-(1) the director(s) 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.
-E.g. if partners are merely negligent, they can still protected by an exculpatory provision.
Issuance of stock
Raising money in a corp:
-Issuance of a security (investment): (i) debt security - corp borrows money (bonds).The person holding a bond is the creditor of corp. (ii) Equity securities - corp sells ownership interest (stock). Person holding stock is a shareholder/stockholder and is an owner of the corp.
Issuance of equity ownership stock:
-Corp sells its own stock.
-Subscriptions: written offers to buy stock from the corp.
-Can you revoke pre-incorporation subscriptions? No, irrevocable for 6 months.
-Can you revoke post-incorporation subscriptions? Yes, can revoke that anytime until it is accepted by the corp.
-At what point are the corp and subscriber obligated under a subscription agreement? When the board accepts the offer.
Consideration (what must corp receives when it issues stock):
-Form: any tangible or intangible property or benefit to corp. Very broad category.
-Amount: par = minimum issuance price.
-Treasury stock: stock the corp issued and then reacquired. It is considered authorized and the corp can then resell it.
-What if corp issues stocks in exchange for property or past services? The board is the one determining the value for that property/past services. Conclusive if it was made in good faith.
Preemptive right: right of existing shareholder to maintain % of ownership by buying stock if there is a new issuance for money ONLY. If articles are silent, you do not have preemptive rights.
Directors & officers
Reqs for directors:
-Adult natural persons
-One or more
-Initial directors named in articles or elected by incorporations. After that, elected by shareholders. Shareholders may also remove the directors before their terms expire. Directors are removable w/ or w/o cause with the exception of a staggered board, whose members are removable only with cause.
-Staggered board: 1/3 or 1/2 board is elected in express intervals.
-Vacancy on board: Board or shareholders choose temporary replacement to fulfill the term.
-Directors must act as a group. Methods of board action: (i) unanimous agreement in writing; (ii) at a meeting.
-Directors cannot give proxies or enter into voting agreements. Directors owe the corp non-delegatable fiduciary duties, unlike shareholders.
Notice for meetings:
-Regular: no notice required
-Special: must give at least 2 days’ notice of the date/time/place of the meeting; purpose of the meeting mustn’t be announced.
Meeting reqs:
-Quorum (majority of all directors to form a meeting): majority of those present required to pass resolution. Quorum can be broken if someone leaves the meeting and at that point the board cannot take an act at that meeting.
Role of board:
-Manages corp.
-Can delegate to a committee of one or more directors, but CANNOT declare a distribution, fill a board vacancy, or recommend a fundamental change to the shareholders. A committee can recommend such actions for the full board action.
Fiduciary duties of directors to corp
-Duty of care (burden on plaintiff): directors must use care that a person in like position would reasonably believe appropriate under the circumstances; manage the corporation to the best of their ability in good faith, in a manner that they reasonably believe is in the best interests of the corporation.
-Breaches: nonfeasance - director does nothing (but must show causation); misfeasance - board makes decision that hurts business (here causation is obvious). But a director is not liable if she meets the business judgment rule - court will not second guess business decision if made in good faith, informed, had rational basis.
- Duty of loyalty (burden on defendant): director must discharge duties in good faith & with reasonable belief that actions are in best interest of corp.
-Business judgment rule does not apply here because the fiduciary has a conflict of interest.
-Breaches: self-dealing/interest director transaction; competing ventures (e.g. Sharon starts own swimming pool company while serving on board on a swimming pool corp); corporate opportunity/expectancy - a director cannot usurp a corporate opportunity, i.e. cannot take it until he tells the board about it and waits for the board to reject that opportunity. Corporate opportunity = something the company has an interest/expectancy in.
-Corp can make loan to director if it is reasonably expected to benefit corp.
Which directors may be liable? Director presumed to concur with board action unless dissent/abstention noted in writing in corp records. An oral dissent alone is not enough! Exceptions:
-Not liable if absent from the meeting
-Good faith reliance on information presented by an officer, employee, or a committee of which the director relying was not a member or its reliance on a professional reasonably believed competent.
Duties of officers
Officers owe same duties of care and loyalty as directors.
Officers = agents of the corp. Whether the officer can bind the corp is determined by whether she has agency authority to do so (actual or apparent).
Officers selected and removed by board.
Indemnification of directors and officers
Fact pattern: someone gets sued by or on behalf of the corp in her capacity as a D or O. She has incurred costs (attorney’s fees, fines, settlement, etc.) and now seeks a reimbursement from the corp.
Category 1: Corp cannot indemnify if D/O held liable to corp or held to have received an improper benefit.
Category 2: Corp must indemnify if D/O successful in defending on merits otherwise.
Category 3 [catch-all]: Corp may indemnify if D/O shows she acted in good faith with reasonable belief that she acted in the corp’s interest (i.e. duty of loyalty). Who determined eligibility for indemnification? Disinterested directors, disinterested shareholders, or independent legal counsel.
Articles can eliminate D/O’s liability only for duty of care cases.
Shareholders
-Generally don’t get to manage the corp, but can run a corp directly through a close corp.
-Closely held corp: small number of shareholders; stock not publicly traded; eliminate board so shareholders can manage directly. You set it alternate management with a shareholder management agreement: (i) have it in the articles and approved by shareholders or (ii) unanimous written shareholder agreement.
-Regardless, whoever ends up managing owes the duties of care and loyalty.
-In close corps, additional special duty: shareholders in close corps owe a fiduciary duty of utmost good faith (to the other shareholders).
Shareholders generally can’t be held liable for corporate debts. But a shareholder might be personally liable for what the corp did if the court pierces the corporate veil:
-Doctrine that allows shareholders to be sued for debts of corp – available only in close corps.
-To pierce the corp veil, must show that: (i) shareholders have abused the privilege of incorporating; (ii) that fairness requires holding them liable.
Two classic piercing the corporate veil fact patterns:
-Alter ego/identity of interests. E.g. x and y are the only shareholders of close corp. X co-mingles personal and corp funds, uses the company credit card for personal spending, etc. The corp fails to pay its bills. A creditor of the corp may collect from x if court finds PCV.
-Undercapitalization: S is a shareholder of Bob Inc, which deals with nuclear waste. Bob Inc has no insurance. They have an initial cap of only $1k. V is injured when one of their trucks melts down. Can V sue S? Court might pierce b/c the corp was undercapitalized when formed, i.e. shareholders failed to invest enough to cover prospective liabilities.
-Courts may be more willing to pierce the corporate veil for a tort victim than for a contract claimant.
Professional corporation
Corp where directors, officers, and shareholders must be licensed professionals. Professionals (e.g. accountants) may incorporate as a professional corp or association.
Professionals are personally liable for their own malpractice, but shareholders are generally not liable for the corp obligations or for the other professionals’ malpractice.
Shareholder as plaintiff
Most often arises in a derivative suit, i.e. shareholder sues to enforce corp’s claim (not her own personal claim).
-If the corp could have brought the suit themselves, it is a derivative suit.
-In contrast, a direct action seeks to enforce duties that a corporation owes to the shareholder (e.g. a suit to compel a dividend). No req to make a demand on the board of directors to act on the corporation’s behalf.
Derivative suit outcomes:
-If P shareholder wins –> money from judgment goes to corp; P recovers costs and fees only.
-If P shareholder loses –> liable for D’s fees if sued w/o reasonable cause. Other shareholders barred from suing on same transaction again.
Requirements to bring deriv suit:
-Stock ownership at the time the claim arose OR must have gotten it by operation of law from someone who did own it then (e.g. inheritance, divorce decree).
-Adequate representation of corp’s interest
-P must first make written demand on the board of directors to act on the corporation’s behalf.
Can the parties settle or dismiss a derivative suit? Only with court approval.
Standard to dismiss derivative suit:
-Independent investigation concludes suit is not in corp’s best interest. Investigation made by independent directors or court appointed panel of one or more independent persons.
-In ruling on this motion to dismiss and the factors are met, the court in most states will dismiss the suit.
Shareholder voting (who votes?)
Authorized stock: max number of shares a corp can sell/issue.
Issued stock: number of shares corp actually sells.
Outstanding stock: shares issued and not reacquired (# of issued shares - # of shares reacquired)
-Unless the q says otherwise, we assume that each outstanding share has one vote. But you must be the record shareholder of that outstanding stock as of the record date to vote.
Record shareholder: person shown as stock owner in corp records.
Record date: voter eligibility cutoff date. BUT this requirement does not apply to proxies, as long as the shareholder who gave the proxy was a shareholder of record on the record date and the proxy is valid.
Exceptions to record owner rule:
-Corp reacquires stock –> no one votes this stock b/c it was not outstanding on the record date.
-Shareholder dies
Voting by proxy: writing authorizing another to vote the shares. Good for 11 months unless it says otherwise.
-Proxy may be revoked by: writing to the corp secretary OR attending meeting and voting.
-Can a shareholder revoke the proxy even though it states that it is irrevocable? Yes.
-Irrevocable proxy: (i) must state that it is irrevocable; (ii) the proxy holder has some interest in the shares other than voting (e.g. an option to buy the shares).
Voting trust:
-Reqs: (i) written agreement controlling how shares will be voted; (ii) give copy of agreement to corp; (iii) transfer legal title to voting trustee; (iv) give original shareholders trust certificates.
Voting (pooling) agreements:
-Must be in writing and signed –> way easier than voting trust! BUT not specifically enforced in some states.
Shareholder voting (where?)
Shareholders usually take an action at a meeting, or by unanimous written consent signed by the holders of all voter shares.
Doesn’t have to be held in state of incorp.
Two kinds of meeting:
-(1) Annual meeting is required.
-(2) Special meeting; can be called by the board, the president, or the holders of at least 10% of the outstanding shares or anybody else as authorized in the bylaws.
Shareholder meeting notice: must be in writing and delivered to every shareholder entitled to vote 10-60 days before meeting.
-Contents must state the date/time/place of meeting.
-For special meetings only, you must also state the purpose of the meeting (b/c you can’t do anything else at the meeting).
Shareholder voting (how?)
-Elect directors
-Remove directors
-Vote on fundamental corporate changes
Shareholder meeting quorum:
-In determining quorum req, focus on the number of SHARES represented at the meeting, not the number of shareholders.
-General rule is that quorum requires a majority of the outstanding shares.
Voting reqs:
-To elect a director, just need a plurality (i.e. person who gets more votes for that seat than anybody else).
-To approve a fundamental corporate change, specific rules.
-For other issues, need a majority of the shares that actually vote on that issue.
Straight voting: separate election for each seat on the board being elected.
Cumulative voting: method to give small shareholders better chance of electing someone to the board. Only available when shareholders are electing directors. You do not vote for each seat individually - there is one at-large election, e.g. if voting on two seats, the top two finishers win in a single election.
-Cumulative voting power: number shares X number of directors to be elected.
-If the articles are silent about cumulative voting, it does not exist.
