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Business Associations > Corporations > Flashcards

Corporations Flashcards

1
Q

What are the 5 types of fact patters that arise on the Bar?

A

(1) Creating a Corp
(2) Issuance of Stock
(3) Directors and Officers
(4) Shareholders
(5) Fundamental Corporate Changes

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2
Q

What is a Corporation?

A

legal entity that is separate from its shareholders.

It can sue and be sued in its own name, enter into contracts, hold legal title to its property, and transact any lawful business.

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3
Q

How is a dejure corporation formed?

A

A dejure corporation is one that has been formed according to law.

A corporation is established when a person (incorporators), draft the articles of incorporation, and file them with the secretary of state.

Person, Paper, Act.

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4
Q

What 4 things must the articles of incorporation contain?

A

(1) the corporate name
(2) stock info (number of shares to be issued)
(3) name/address of the incorporators
(4) name and address of registered agent

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5
Q

What may the board of directors adopt?

A

Bylaws

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6
Q

What are Bylaws?

A

rules that govern the internal operations of the corporation

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7
Q

If the bylaws and articles of incorporation conflict, what is the result?

A

The articles of incorporation will prevail

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8
Q

What is a promoter?

A

An individual who acts on behalf of the corporation before it has been formed.

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9
Q

When is a promoter liable?

A

(1) he acts on behalf of a corporation AND
(2) knows that no corporation has been formed

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10
Q

Is a promoter personally liable for a pre-incorporation contract if the corporation subsequently adopts it?

A

YES! Both the corporation and the promoter will be liable.

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11
Q

When is a promoter NOT liable for a pre-incorporation contract?

A

If:
(1) there is a novation OR
(2) the contract provides that the promoter is not personally liable.

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12
Q

Defective Incorporation and Owner Liability

A

Under the rules, if a corporation’s formation is defective, then the shareholders may be personally liable for the corporation’s liabilities and contracts.

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13
Q

When is a DeFacto Corporation Formed?

A

when the entity
(1) attempted to incorporate in good faith
(2) was eligible to incorporate AND
(3) took business action as a corporation

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14
Q

What is the effect if a DeFacto corporation exists?

A

It prevents personal liability of shareholders who were UNAWARE that the corporation was not properly formed.

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15
Q

What is corporation by Estoppel?

A

Parties who act as if a corporation has been formed will be estopped from denying that a corproation has been formed.

Prevents parties from backing out of contracts on the grounds that a corporation has not been formed.

ONLY applies to K’s. Does NOT apply to torts.

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16
Q

What is the internal affairs doctrine?

Know this

A

The internal affairs of the corporation are governed by the law of the state of incorporation.

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17
Q

When a corporation issues (sells) stock, what must it received?

A

CONSIDERATION

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18
Q

What are valid types of consideration that a corporation may accept when issuing stock?

A

any tangible or intangible property ot benefit to the corporation.

Money, property, services already performed, discharge of a debt, promissory notes, or promises of future work.

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19
Q

What is watered stock?

A

When par value stock is issued for less than its par value.

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20
Q

If directors authorize a sale of stock for less than the stated par value, what is the result?

A

The shares are validly issued, but the directors who authorized the issuance can be held liable for breach of fiduciary duty.

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21
Q

What is a preemptive right?

A

The existing shareholder of common stock has the right to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance (sale) of stock for MONEY.

The articles of incorporation must provide the shareholders with this right.

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22
Q

Piercing the Corporate Veil

A

Under the law, a corporation shields its shareholders from personal liability. However, courts may disregard the corporate form and hold the shareholders personally liable for the corporation’s acts by piercing the corporate veil.

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23
Q

What must a plaintiff prove to pierce the corporate veil?

A

A plaintiff must show that the shareholders of the corporation or member of the LLC abused the privilege of incorporating by:
(1) undercapitalizing the corporation,
(2) failing to follow formalities to form the corporation,
(3) that the corporation is an alter ego because the shareholders have co-mingled assets, or
(4) the corporate form was created to deceive creditors.

Further, the plaintiff must prove that fairness requires holding the shareholders personally liable.

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24
Q

Who is liable if the veil is pierced?

A

Only shareholders who are active in the operation of the business. Liability is jointly and several.

Shareholder may be another corporation, parent corp, etc.

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25
Q

Who may pierce the corporate veil?

A

Creditors! Courts will almost never pierce the veil at the request of a shareholder.

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26
Q

What types of corporations does piercing the veil apply to?

A

Closely held corporations and LLC’s

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27
Q

What is a close corporation?

A

Few shareholders

Stock is NOT publicly traded

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28
Q

What is the special fiduciary duty in close corporations?

A

Courts impose a fiduciary duty on shareholders owed to other shareholders because a close corporation looks like a partnership.

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29
Q

When can a director’s personal liability be limited or eliminated?

A

Under the rules, the articles of incorporation may limit or eliminate a director’s personal liability for money damages to the shareholder or corporation.

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30
Q

The articles may not limit director liability for:

A

(1) receiving a benefit to which he was not entitled;
(2) intentionally harming the corporation or the shareholders;
(3) unlawful corporate distributions; or
(4) intentionally committed a crime.

Director WILL be personally liable

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31
Q

Which directors are personally liable for unlawful actions?

A

A director is presumed to concur with board action and may be liable for acts of other board members UNLESS the director dissents in writing.

In writing means:
(1) in the minutes
(2) delivered to the president at the meeting or
(3) written dissent to the corp immediately after the meeting

Exception: A director is not personally liable under the rule if she was absent from the board meeting (sick).

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32
Q

How do shareholders control the corporation?

A

shareholders control the corporation by electing directors, amending bylaws, and approving fundamental changes.

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33
Q

Who manages the business and affairs of the corporation?

A

DIRECTORS

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34
Q

Can directors be removed before their terms expire?

A

Yes.

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35
Q

When can directors be removed?

A

By the shareholders with or without cause.

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36
Q

Is an individual director an agent of the corporation?

A

NO. Individual directors have NO authority to speak for or bind the corporation.

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37
Q

How does the board take action?

A

By acting as a group, even if there is only 1 director.

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38
Q

What are the two ways that directors may act?

A

(1) unanimous agreement in writing (email is ok) OR

(2) at a meeting that satisfies the quorum and voting requirements.

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39
Q

What happens if a director gives a proxy?

A

It is VOID because directors owe the corporation non-delegable fiduciary duties.

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40
Q

Does a director have the power to bind the corporation in contract?

A

No. UNLESS there is actual authority to act.

A director has actual authority only if:

(1) proper notice was given for a director’s meeting, a quorum was present, and a majority of the directors approved the action

OR

(2) there was a unanimous written consent of the directors.

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41
Q

A director has actual authority to bind the corporation in contracts ONLY IF:

A

(1) proper notice was given for a director’s meeting, a quorum was present, and a majority of the directors approved the action

OR

(2) there was a unanimous written consent of the directors.

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42
Q

How can a board of director’s quorum be broken?

A

When people leave the meeting. Once a quorum is no longer present, the board cannot act at the meeting.

DIFFERENT FOR SHAREHOLDERS

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43
Q

What are the shareholder’s inspection rights?

A

Under the rules, shareholders have a right to inspect corporate books and records as long as a demand is made in good faith and for a proper purpose.

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44
Q

What is a Proper Purpose?

A

A proper purpose is one that is reasonably related to a shareholder’s interest.

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45
Q

What must a shareholder do in order to inspect records?

A

A shareholder must make a demand in writing that states:
(1) his purpose,
(2) the record to inspect, and
(3) how the record is directly related to the purpose.

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46
Q

What records may a shareholder inspect without providing a proper purpose?

A

Articles of Incorporation
Bylaws
Board of Director Resolutions
Minutes of Shareholder Meetings
Contact info of Directors and Officers
Annual Reports

47
Q

When may a shareholder bring an action against a director?

A

Under the rules, a shareholder may file an action against the directors to show the director’s acts are:

illegal,
fraudulent, or
willfully unfair

to either the corporation or the shareholder.

48
Q

What are the two types of shareholder suits that may be asserted and what does it depend on?

A

Direct or derivative

It depends on the injury

49
Q

Direct Suit

A

Under the rules, a shareholder may bring a direct suit against the board of directors when there is a breach of the duty owed to a shareholder personally.

The damages will go to the shareholder or member of the LLC.

50
Q

S, a shareholder of C Corp., sues the board of directors of C Corp. or breaching the duty of loyalty OR care.

Is this a derivative or direct suit?

A

ALWAYS a derivative suit because the corporation has the right to sue the directors for breach of fiduciary duties.

51
Q

S, shareholder of C Corp., sues the board of directors for issuing new stock without honoring her preemptive rights.

Is this a direct or derivative suit?

A

Direct.

The shareholder suffers immediate harm and the director’s duty was to the shareholder.

52
Q

What is a derivative suit?

A

Under the rules, a shareholder may bring a derivative suit when an injury is caused to the corporation and a shareholder is enforcing the corporation or LLC’s rights.

53
Q

What are the 3 requirements to assert a derivative suit?

SAD

A

A shareholder can bring a derivative suit if:

(1) Standing (satisfied if the person is a shareholder at the time of injury)
(2) Adequacy (shareholder represents the interests of the corp)
(3) Demand (shareholder files a written demand and waits 90 days before filing suit unless irreparable injury would result from such a demand)

54
Q

When can a derivative suit be dismissed?

A

With court approval if it is not in the best interest of the corp to continue the suit.

55
Q

What are the types of shareholder meetings and requirements for each?

A

Annual meetings - electing directors
Special meetings - to conduct business requiring shareholder approval. NOTICE is required and it must state the purpose of the meeting.

56
Q

Which shareholders are entitled to vote at shareholder meetings?

A

Registered shareholders on the record date.

57
Q

Who fixes the record date?

A

The Board of Directors.

58
Q

Define Authorized Stock

A

Number of shares the corporation may issue as set forth in the Articles of Incorporation.

59
Q

Define Issued Stock

A

Number of shares the corporation has sold.

60
Q

Define Outstanding Stock

A

The shares the company issued but has not reacquired.

**Only outstanding stock may be voted.

61
Q

Each issued share is entitled to

A

ONE vote

62
Q

What is the quorum requirement?

A

A quorum is required for a vote to be cast at a meeting and requires a majority of the shares entitled to vote to be present.

Generally, more votes must be cast in favor of the resolution than against it to pass.

63
Q

Which shares may be voted?

A

Only outstanding shares may be voted. Shares that were issued and outstanding, but have been repurchased, called treasury shares, are not outstanding.

64
Q

What is a proxy vote? For how long is it valid? What is the exception?

A

Under the rules, shareholders may vote by proxy executed in writing by signing an appointment form or making a verified electronic transmission.

A proxy is only valid for 11 months and is freely revocable by the shareholder, even if it states it is irrevocable. Any action inconsistent with the grant of proxy works to revoke it.

EXCEPTION: a proxy is not revocable if it explicitly states it is irrevocable and is coupled with an interest (ex: sale of shares).

65
Q

How are officer’s selected? What do officers do? What type of authority do officer’s have?

A

The BOD may elect officers to manage the day to day business of the corporation.

Authority of officers may be actual as outlined in the bylaws or as provided by the BOD,

or

apparent if a third party believes the person has authority and the belief is traceable to the corporation’s manifestations (holding them out as having authority).

66
Q

What fiduciary duties do directors owe the corporation?

A

Under the rules, a director must discharge her duty in good faith and with the reasonable belief that her actions are in the best interest of the corporation. A director must also use the care that a person in like position would reasonably believe appropriate under the circumstances.

67
Q

Under the duty of care,

A

directors must be reasonably informed in making business decisions. They are entitled to rely upon information, opinions, reports, or statements of corporate officers in making a decision.

A party claiming that the director breached the duty of care has the burden of proof.

If a director breaches the duty of care, he may be personally liable to the corporation for any losses that result.

68
Q

What are the two ways that duty of care comes up?

A

(1) Nonfeasance - director does nothing. Must show that failure to act caused harm to the corp.

(2) Misfeasance - the directors make a decision that harms the corporation.

69
Q

Under the Business Judgment Rule,

A

there is a presumption that a director’s decision may not be challenged if the director (1) acted in good faith, (2) with reasonable care, and (3) in a manner the director reasonably believed would be in the best interest of the corporation.

Corporate law allows directors to rely on the opinions of experts and corporate insiders generally.

NOTE: A reasonable person would not rely on the opinion of a person with a personal interest in the transaction.

70
Q

What duty does the business judgment rule apply to?

A

ONLY THE DUTY OF CARE

71
Q

Under the duty of loyalty,

A

the director must act in good faith, with reasonable belief that what he does is in the best interest of the corporation, AND without personal conflict.

72
Q

A director breaches the duty of loyalty in 3 ways BCC:

A

Both sides of the transaction when the director has a material interest in both sides of the K and approves it.

Competes with corporation

Usurps a Corporate opportunity

73
Q

If a director learns of a business opportunity, what must she do?

Tested

A

This leads to potential usurpation of a corporate opportunity.

The director must consider whether the corporation would be interested.

The director must present the opportunity to the corporation and disclose all material facts.

The director may personally take advantage of the opportunity only if the corporation decides not to pursue it.

74
Q

May the corporation or LLC waive the duty of loyalty?

A

Yes, so long as it is not unreasonable.

75
Q

DEFENSES TO BREACH OF DUTY OF LIABILITY:

A transaction cannot be set aside merely because a director had a personal interest in the transaction if :

A

(1) the director disclosed the material facts of the transaction to disinterested members of the board (or the shareholders) who approved the transaction, or

(2) the transaction was fair to the corporation.

76
Q

How is a LLC formed?

A

Under the rules, an LLC is created by filing articles of organization. LLC’s are generally analyzed under corporate or partnership laws.

77
Q

Do members of the LLC have fiduciary duties?

A

YES. The same as corporations.

78
Q

Under the rules, a member in an LLC has authority to

A

hire an agent to assist in the conduct of the business. A person may become an agent even if they are not compensated. An agent’s duties to the LLC may be limited by their scope of authority.

EXAMPLE:
An agent who has authority to purchase equipment, does NOT have authority to receive notice.

79
Q

When does dissociation and dissolution of LLC’s arise?

A

Under the rules, if a member leaves an LLC, then it leads to dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC. Dissociation terminates a member’s management rights and duties in the LLC.

Example: Sending a text that a member wishes to stop being part of the LLC and demand to have interest bought out is not effective. The member is dissociated, but the company lives on. The member is not entitled to have her interest bought out.

80
Q

Are members of an LLC personally liable for the LLC’s obligations and losses?

A

Generally, individual members of an LLC are not liable for losses. They are only liable if the court decides to pierce the LLC veil or if proper procedures for dissolution and winding up have not been followed.

81
Q

Do Members of an LLC have authority to bind the LLC in contracts entered into?

A

Members of an LLC have actual and apparent authority to bind the LLC in contracts entered into in the ordinary course of business.

IF not in the ordinary course of business, then consent of the other members are required.

82
Q

What are Director’s rights in a corporation?

A

Directors manage the corporation and (like shareholders) act as a body by voting.
Directors may exercise all corporate powers that are not limited by the articles of incorporation or
a shareholders’ agreement, including the power to form contracts and acquire liabilities.
Shareholders hire and fire directors. Directors cannot vote by proxy or agreement. A quorum
(majority of directors) needs to be present for a vote to take place, but unlike shareholders,
directors can “break quorum” by leaving. Notice is required only for special meetings.

83
Q

Can director’s vote by proxy?

A

NO. Only shareholders can vote by proxy.

84
Q

Officers are ____ of the corporation.

A

AGENTS

85
Q

How is an officer’s authority determined?

A

Agency law determines the authority and powers of officers.

86
Q

Whether an officer can bind the corporation is determined by

A

whether she has agency authority to do so (actual, apparent, or ratification.)

87
Q

The corporation is liable for actions by its officers within the scope of their authority, even if

A

the particular act in question was not specifically authorized.

Ex: president of a corp generally has apparent authority to bind the corp to contracts in the ordinary course of business.

88
Q

Do officers owe the corporation the same duties of care and loyalty as directors?

A

YES.

89
Q

Officers are selected and removed by

A

the board of directors

with or without cause.

*shareholders do NOT hire and fire officers.

90
Q

What are distributions?

A

Payments by the corporation to the shareholders.

Dividends, redemptions, issuance of shares, etc.

91
Q

How are distributions determined?

A

Solely within the director’s discretion.

A shareholder has a “right” to distributions only when the board declares it.

92
Q

Do shareholders have a right to compel distributions?

A

Generally no.

The shareholder must make a compelling showing of abuse of discretion.

Ex: corporation makes profits and the board refuses to declare the dividend while paying themselves a bonus.

93
Q

Which shareholders get dividends?

A

Record shareholders as of the record date.

94
Q

Director liability for unlawful distributions - how are they liable and for what?

A

Directors are jointly and severally liable for improper distributions.

A director who votes for improper distribution is personally liable to the corporation for the amount that exceeds what could have been properly distributed.

95
Q

A director who us liable for n unlawful distribution is entitled to contribution from:

A

(1) each director who could be held liable (those who voted in favor)

and

(2) each shareholder for the amount accepted while knowing that the distribution was improper.

95
Q

What is the director’s good faith reliance defense for unlawful distributions?

A

A director is not liable for distributions approved in good faith:

(1) based on reasonable financial statements or fair valuation

OR

(2) relying on info from officers, employees, counsel, accountants, etc.

96
Q

What is required to do a fundamental corporate change?

A

(1) board action adopting a resolution
(2) board submits the proposal to the shareholders with written notice
(3) shareholder approval

Sometimes deliver doc to secretary of state

97
Q

What are types of fundamental corporate changes?

A

Amending articles
Merging companies
Transferring substantially all assets (or having stock acquired)
Converting to another form of business
Dissolving

98
Q

What shareholder vote is required to approve a fundamental corporate change?

A

majority of the shares entitled to vote

99
Q

What is the remedy if a shareholder does NOT vote in favor of a fundamental corporate change?

A

The shareholder has the right of appraisal where they force the corporation to buy their stock for value.

100
Q

How is a corporation dissolved?

A

When a majority of the incorporators deliver articles of dissolution to the state.

Dissolution is not the end of the corporation, it just means the corporation cannot carry on any business except to liquidate.

101
Q

What is winding up?

A

The process to ens the corporate existence.

Steps:
Give written notice to creditors and publish notice
gather assets
convert assets to cash
pay creditors
distribute sum to shareholders

102
Q

When may shareholders petition for involuntary dissolution?

A

(1) Director misconduct - abuse, waste of assets, etc.
(2) Directors are deadlocked in the management of the corp and the shareholders cannot break it and irreparable injury is threatened
(3) shareholders are deadlocked in voting for a director for 2 annual meeting dates
(4) Corporation has abandoned its business and failed to dissolve in a reasonable time

103
Q

A corporate President’s authority is governed by

A

Agency law

104
Q

A president will have the power/authority to enter into

A

ordinary contracts involving the day to day operation of the corporation.

105
Q

When can a president have authority to enter into extraordinary transactions?

A

If the board of directors authorize it.

106
Q

Can the board of directors give the president more power than what they have?

A

NO. BOD cannot give more power than what they have.

107
Q

If the articles are silent, a board of directors meeting can take place if:

A

there is a quorum present consisting of a majority of the directors.

108
Q

Resolution at a BOD meeting can be passed by

A

the vote of the majority of the quorum

109
Q

A fundamental change can be implemented only if:

A

(1) the directors pass a resolution to approve it AND
(2) the plan is approved by the shareholders

110
Q

Shareholders who dissent from a fundamental corporate change can

A

force the corporation to purchase their shares at a fair price

111
Q

To use the appraisal remedy, the shareholders must:

A

(1) file an objection to the transfer before or at the shareholders meeting where the vote takes place
(2) not vote in favor of the plan AND
(3) send the corporation a written demand for the fair value of their shares.

The shareholder must also deposit his shares with the corporation as directed.

112
Q

If a corporation does not want to pay what the shareholders demanded under an appraisal defense,

A

the corporation must file a suit to have the court determine fair.

Business Associations (3 decks)

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