Corporations Flashcards
Promoter Liability
a promoter is someone who works on behalf of the corporatioh to create and fund the entity, before the corporation exists
a promoter is personally liable for breach of contract, even after C is formed, unless there is a novation, or the 3P knew of the preformation status and agreed to only look to the C for performance
a promoter owes a fiduciary duty to the C and a secret profit is a breach
cannot compel payment since corporation did not exist
Corporate liability for preformation contracts
not liable unless there is a novation or express or implied adoption of the contract
Incorporation procedure
incorporator must signa nd file articles with the state and pay filing fee
articles must have name of corporation, contact info of local agent and incorporators, numbers of authroized shares
Ultra Vires actions
if a corporation has a narrowly stated purpose in the articles, and acts beyond that burpose, it is an utlra vires act.
Void at common law, now enforceable
Shareholder or state can file suit to enjoin it or take action against director/officer/employee
Timing
the entity is formed on the date the articles are filed as long as the state accepts it
De Jure Corporation
when all statutory requirements are met, the corporation is formed and the corporation is liable for corporate activities
De facto corporation
not recognized in majority
despite defective incorporation, if owner made good faith effort to comply and operated without knowing that the requirements were met, there is a de facto corporation
Corporation by estoppel
a person dealing with an entity in a contractual agreement as if it were a corporation is estopped form denying its existence and seeking personal liability
By laws
directors adopt bylaws, which are day to day rules
when in conflict, articles control
may be amended or repealed by majority vote of either shareholders or directors
Piercing the Corporate Veil
a plaintiff can pierce the corporate veil and hold shareholders personally liable to recover on the basis of fraud or unfairness
more likely granted in tort than contracts cases
Grounds:
Alter ego: failure to observe corporate formalities, or corporation is just the shareholder’s alter ego
**Undercapitalization: **failure to maintain sufficient funds to cover liabilities
Fraud: parties engaged inf raud or fraud like behavior
Types of stock
common: entiteld to vote and represents ownership
preferred: stock given priority with dividends and during liquidation
Issuance of stock
Authorized by articles and board of directors
Consideration can be money, property, or services as long as value is determined in good faith by board
Par value if exists, stock must be at least that much
watered stock sold for under par value
Stock subscriptions
an agreement to buy stock before formation of the company, irrevocable for 6 months
Preemptive rights
must be authorized in the articles of incorporation
if the board issues new shares, shareholders with this right can purchase additional shares to maintain proportional ownership
Distributions
a shareholder cannot compel a distribution unless the corporation acts in bad faith or abuses its discretion
a corporation cannot make a distribution if it is insolvent or the distribution would cause insolvency
directors are personally laible for unlawful distributions
priorities: prefrred, preferred participating, cumulative, common
Shareholder duties
shareholders elect the board of directors and vote on fundamental changes
Shareholder meetings
must have annual meetings to elect board
special meetings to approve fundamental changes
Notice: no less than 10 no more than 60 days, must include when and where, and purpose if for special,
failure to provide notice allows SH to challenge actions unless there is a waiver
waiver: if waive in signed writing or attends meeting without objecting
Unanimous written consent
unanimous written consent is needed form all shareholders to act without a meeting
Voting
only a shareholder who owns shares on the record date is entitled to vote
Proxy
a third party can be appointed to vote if in a signed writing sent to the corporation
valid for 11 months unless stated
revocable unless otherwise specified and coupled with an interest
Quorum for shareholder meeting
a majority of eligible shares must be present to hold a vote,
a vote will be approved if votes in favor exceed votes against unless otherwise specified in the articles
Cumulative voting
articles may give a shareholder the number of votes equal to the number of shares multipled by the number of director seats.
Voting agreements
a shareholder can enter a contractual agreement to vote shares in a specific way. Subject to contract law but need not be filed and have no durational limit
Shareholder right to inspect records
SH may inspect and copy records with 5 days notive if theys tate a proper purpose
a proper purpose is related to a financial interest of SH And not to harass the corporation
SH direct suit
a shareholder may directly sue the corporation for a breach of duty to the shareholder personall which causes the shareholder direct harm
SH derivative suit
standing: must be shareholder at the time of the wrong and maintain ownership throughout litigation; shareholder must fairly and adequetly represent interests
demand shareholder must make a written demand on the board and wait 90 days unless board rejects it or waiting would cause irreparable injury or demand would be futile
recovery goes to corporaiton, but SH can seek reimbursement for atty fees if the corporation got a substantial benefit
Shareholder liability
generally no duties to each other or the corporation
Controlling shareholder has enough of the shares to enact major change, cannot use power to prejudice the minority, may owe duty for selling stock to a looter etc
amendment of articles of incorporation
may be amended by board until stock issued, after that Board must adopt amendment then ask shareholders for approval
Board of directors
manages and directs corporations business
must have at least one director
elected by shareholders
can be removed with or without cause
Director meetings
board takes actions through meetings or unanimous written consent
no notice required for regular meeting, 2 days for special meeting
no proxies allowed
Director voting
quorum: requires majority of directors
presence: no proxies, but can attend virtually
if quorum present, majority of those present holds the vote
no voting agreements allowed
Dissenting by board member
a director may dissent to board action to avoid being liable
voting against does not shield, requires an objection and esnuring that dissent is in the minutes or in writing
Commitees
committees are allowed
a publicly traded corporation is required to ahve an independent audit committee under Sarbanes Oxley
Compsenation of board
board sets its own compensation, but an excess is a waste of assets
Officers
run the daily business and are appointed by the board. can be removed without cause
owe a fiduciary duty of care and loyalty
Duty of Care
Must act as a prudent business person in like circumstances, including any special skills/expertise
Business Judgment Rule
in the absence of fraud, illegality, or self-dealing, the good faith actions of a director will not be disturbed (defense to breach of duty of care)
Duty of loyalty
A director must act in the best interest of the corporation
**Self dealing: **a transaction between the corporation and a director (or relatives) is a breach of duty of loyalty unless ratification by neutral directors or shareholders or the transaction was fair to the corporation at the time of the transaction
Corporate Opportunity cannot usurp corporate opportunity unless first notifes the board and waits til they decide, measured by interest and expectancy
Competing venturecannot engage in a buisness that competes with the corporation
Right of indemnification
**Mandatory: **if D sucessfully defends the action
Prohibited: D found liable for receiving an improper personal benefit
**permissive: **D acted in good faith or had no cause to know acts were unlawful
Rule 10b-5 action
a buyer or seller using interstate commerce may allege a violation against a defendant who intentionally engaged in fraud or deception, causing the plaintiff to suffer harm based on justified reliance
Rule 16(b)
a corporate insider can be forced to disgorge short swing profits
publicly traded corporation
more than 10% of stock
6 month period
Fundamental Corporate changes
must be approved by both board of directors and shareholders
mergers
sale of substantially all assets
amending the articles
Dissolution
Dissolution
voluntary: by approval of both shareholders and directors
involuntary: by creditors if corporation is insolvent or by shareholders if waste, illegality/fraud, director deadlock, shareholder deadlock over director election
Right of appraisal
a shareholder who is entiteld to vote on a fundamental change can force the corporation to buy the stock at a fair value
Must give notice before vote, must have **abstained or voted against **the merger, must serve written demand
Limited Liability Company (LLC)
provites investors (members) with limited liability (like corporation) but has pass through taxation (like a partnership)
created by filing artices with the state
new members must have consent of all members
Management of LLC
members managed llc: members can bind the LLC
manager managed LLC: members cannot bind LLC
Fiduciary duties of members
owed to eachother and to the entity itself
Profits and losses
presumed to be allocated according to contribution unless operating agreement says otherwise
