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Rule Statements > Corporations > Flashcards

Corporations Flashcards

1
Q

Formation of an Organization

A

Person/Paper/Act

One or more incorporators execute/deliver articles to Secretary of State and pay required fees; corporation exists upon this filing by the state

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2
Q

What is included in the Articles of Incorporation?

A
  1. Name of corporation
  2. Name and address of each incorporator and registered agent;
  3. Number of authorized shares
  4. (optional) - sometimes clause limiting corporations purpose/activities beyond the scope of purpose are “ultra vires” and directors an be liable for these

articles trump bylaws if issue

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3
Q

Organizational Meeting

A
  1. Adopts initial bylaws
  2. Appoints officers

If directors named in articles –> BOD hold organizational meeting

If initial directors NOT named –> incorporators hold organizational meeting

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4
Q

Internal Affairs Doctrine

A

Internal affairs of a corporation are governed by the law of the state of incorporation

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5
Q

Doctrines to raise if incorporators thought they formed an organization but failed to do something effectively in formation?

A
  1. De Facto Corporation
  2. Corporation by Estoppel

Can prevent liability be person acting on behalf of corp.
some states do not recognize these jurisdictions

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6
Q

De Facto Corporation

A
  1. Colorable compliance with the incorporation statute;
  2. Exercise of corporate privilege (acting as though there was a corporation)
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7
Q

Corporation by Estoppel

A

People treating the business as a valid corporation are estopped from denying the corporation’s existence

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8
Q

Pre-Incorporation Contracts by a Promoter (person acting on behalf of corp.)

A

Corporation can be come liable on these contracts if:

  1. Express adoption: board takes action adopting the K
  2. Implied adoption: corporation accepts benefit of the K

promoter will be personally liable until novation occurs

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9
Q

Debt vs. Equity Securities

A

Debt securities = bond
Equity securities = stock

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10
Q

Types of stock

A

Authorized shares: max number, described in articles of incorporation

Issued and outstanding: shares that have been sold

Authorized but unissued (treasury): shares that have been reacquired by corporation

Par = minimum issuance price
No par = no minimum issuance price

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11
Q

Watered Stock

A

Occurs when value of stock is issued for less than it’s par value

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12
Q

MBCA Approach to Stock Price

A

Eliminates par and determined value based on appropriate board evaluation made in good faith

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13
Q

Director’s Role

A
  • Responsible for management of business/affairs of the corporation
  • Must be adult natural persons (humans w/ legal capacity)

Shareholders can remove directors before express term expires w/ or without casuse

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14
Q

How does Board of Directors take action?

A

Act as a GROUP by:

  1. Unanimous agreement in writing
  2. At a meeting that satisfies the quorum and voting requirements

*acts are void otherwise, unless ratified
*directors cannot give proxies

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15
Q

Board Meetings

A

Regular: notice not required
Special: 2 days written notice with time and place

Quorum must be present at any meeting of the board

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16
Q

Board Quorum

A

Majority of all directors

  • If quorum present –> passing resolution requires majority of people present
  • Can be lost/broken if people leave
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17
Q

Committees (created by board) cannot take the following actions:

DFR

A
  1. Declare distribution
  2. Fill board vacancy
  3. Recommend a fundamental change to SHs
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18
Q

Director Fiduciary Duty Standard to Corporation - IMPORTANT!!!

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 person in like position would reasonably believe appropriate under the circumstances (Care).

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19
Q

Duty of Care can be breached

A
  1. Nonfeasance
  2. Misfeasance

*burden on plaintiff/challenger

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20
Q

Nonfeasance

A

Director does nothing; doing nothing has CAUSE loss to corporation

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21
Q

Misfeasance

A

When board takes action that hurts the business

  • board not liable if they do their homework before making a decision (BJR)
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22
Q

Breach of Duty of Loyalty

A
  1. Self Dealing
  2. Competing Ventures
  3. Corporate Opportunity/Expectancy

*burden on defendant/BJR does not apply

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23
Q

Self Dealing

A

Any transaction between the corporation and (1) one of it’s directors; (2) directors close relative; (3) another business of the directors

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24
Q

Self Dealing transaction will be upheld when

A
  1. Was approved by majority of disinterested directors upon disclosure of ALL material facts
  2. Judged by circumstances, it was fair

If improper –> can enjoin, set aside, sue for damages

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25
Q

Competing Ventures

A

Directors can engage in unrelated business, but engaging in a directly competing business can breach duty of loyalty

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26
Q

Corporate Opportunity/Expectancy

A

Fiduciary duties prohibit director from diverting / “usurping a corporate opportunity” to themselves

*Board must reject/deny the opportunity
*Corporations lack of financial ability is not a defense

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27
Q

Director Duty to Disclose

A

Duty to disclose material corporate information to other members of the board

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28
Q

Officers

A

Agents of the corporation
- Owe same duties of care/loyalty
- Selected and removed by board
- Board sets officer compensation

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29
Q

NO Indemnification for Directors/officers/Employees when

A

Corporation cannot indemnify a director who:
1. Is liable to the corporation;
2. Held to have received an improper benefit

30
Q

Corporation MUST indemnify directors/officers that:

A
  1. Were successful in defending a proceeding on the merits or against the officer/director
  2. Some states require they win whole case, others require they only win to certain extent
31
Q

Corporation MAY indemnify (permissible) when:

A

For reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of the directors position if:
- director acted in good faith AND
- believed her conduct was in best interest of the corporation

32
Q

Shareholder special fiduciary duty in close corporation

A
  1. Fiduciary duty owed to other shareholders
  2. Controlling shareholders cannot use power to benefit at expense of minority shareholders
  3. Duty to disclose material information to the minority shareholders
32
Q

Shareholders

A

Generally do not run corporation on day to day basis

Exception: closely held corporations can dispense board by shareholders agreement and run through different scheme

  • Indirectly run corporation by:
    electing directors, amending bylaws, approving fundamental changes
33
Q

Record Shareholders

A

Shareholders of record on the record date have a right to vote:

  • at annual meeting to elect directors;
  • regarding fundamental corporate changes
  • record date set by directors but cannot be more than 70 days before meeting
34
Q

Shareholder meeting notice

A

Annual meeting: date, time, location

Special meeting: date, time, location, purpose (authorized purpose)

If improper notice –> actions can be nullified or waived by attending without complaint

35
Q

Exceptions to Record Date

A
  1. Treasury Stock
  2. Death of SH
  3. Voting by Proxy
  4. Voting Trust
36
Q
  1. Treasury stock = authorized but unissued
A

If stock was not outstanding on the record date, then no one gets to vote this stock.

37
Q

Death of SH

A

Executors of SH can vote

38
Q

Voting by proxy

A

Vote in person or by proxy permitted (written proxies valid for 11 months)

Proxy: writing, signed by the record shareholder and directed to the secretary of the corporation authorizing another to vote shares

  • Revocable by SH attending meeting/in writing to secretary/ or subsequent appointment of another SH
  • Irrevocable when (1) coupled with interest or given as security
39
Q

Voting Trust

A
  • Written trust agreement controlling how shares will be voted;
  • copy of the agreement given to the corporation;
  • legal title to the shares is transferred to voting trustee;
  • original shareholders receive trust certificates and retain all shareholders rights except for voting
40
Q

Shareholders get to vote on

A
  1. Electing Directors
  2. Removing Directors
  3. Fundamental corporate changes

REMOVING OFFICER = NOT A SHAREHOLDER ITEM

41
Q

Shareholder Quorum

A

Majority of outstanding shares entitled to vote, unless articles/bylaws require a greater number

  • Shareholder quorum NOT lost if people leave meeting
42
Q

Shareholder Straight vs. Cumulative Voting

A

Straight Voting:
separate election for each seat on board being elected; each share gets one vote for a seat

Cumulative Voting:
one election at large; top two finishers are elected to the board
Voting power = Number of shares X number of directors to be elected
- automatic in some states

43
Q

Shareholder management agreements

A
  1. Used in small corporations
  2. may agree to run the corporation in any way
  3. Can even dispense with board
44
Q

Shareholder share transfer restrictions

A
  1. Generally, freely transferable
  2. Shares may conspicuously provide for restriction
  3. Restrictions must be reasonable
45
Q

Shareholder inspection rights

A

Limited Rights: books, papers, accounting records
- SH must give 5 days written notice
- Have a proper purpose related to shareholders rights

Unqualified Right For: articles/bylaws, minutes of shareholder meetings, names and addresses of current directors, and recent annual reports

46
Q

Shareholder preemptive right

A
  1. Right to purchase shares to maintain appropriate ownership interest
  2. Under MBCA, exists only if provided for
  3. Does NOT apply to:
    - shares issued as compensation;
    - shares issued within 6 months of incorporation
    - shares issued for consideration other than money
    - nonvoting shares with a distribution preference
47
Q

Shareholder derivative suit & how is SH entitled to bring derivative suit?

A

Shareholder is suing to enforce the corporation’s claim, not her own personal claim

  • could the corporation have brought suit?

If SH wins –> corp. gets money
If SH loses –> cannot recover costs

  1. Must have owned shares at time of wrong (standing)
  2. must maintain ownership throughout suit
  3. Demand board to bring suit
48
Q

Shareholder direct action

A

Suit to enforce the right of a shareholder

Recovery in direct suit –> goes to SH themselves

49
Q

Shareholder liabilities

A

Not fiduciaries; may act in self-interest

Exception: controlling SH cannot use control to obtain special advantage at expense of minority shareholders

50
Q

Distributions

A

Generally in form of dividend or of assets after dissolution

  • Shareholders have NO right to compel distribution
  • No right to receive unless declared by board
  • Preferred stock paid before common
51
Q

Insolvency Limitation on Distribution

A

Corporation cannot make any distribution if it’s insolvent or the distribution would render the corporation insolvent

  • can’t pay debts as they become due
  • total assets less than total liabilities
52
Q

Shareholder Distributon - Preferences

A
  1. Cumulative - if distribution is not declared or paid in certain year, it accumulates until paid
  2. Cumulative if earned - preference accumulates only if profits for year were sufficient to pay preference
  3. Participating - receive stated preference and a share of the distribution made to common shareholders
53
Q

Piercing Corporate Veil

A

Shareholders generally not liable for corporate debts, unless veil peirced.

  1. Must have abused privilege of incorporating AND
  2. Fairness holds them liable

easily in tort cases, not always in contract cases

If pierces –> only active SHs liable

54
Q

Director Liability related to Distributions

A

Director who votes for an unlawful distribution –> personally liable for excess

Director may seek contribution from other directors who voted for distribution

Directors may recover from a SH who received a distribution knowing it was unlawful

55
Q

Common Scenarios for Piercing the Corporate Veil

A
  1. Alter Ego Docrine
  2. Inadequate Capitalization at Inception
  3. Perpetrating a Fraud/Avoiding Existing Obligations
56
Q

Alter Ego Doctrine

A

If shareholders ignore corporate formalities such that the corporation is an “alter ego” of the shareholders and basic injustice results

  • treat assets as own / commingle $
57
Q

Undercapitalization

A

Corporation is inadequately capitalized; at time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities

58
Q

Fraud/Avoiding Existing Obligations

A

Veil can be pierced to prevent fraud/prevent an individual shareholder from using entity to avoid existing personal obligations

  • can be formed to limit future liabilities but CANNOT be formed to avoid existing liabilities
59
Q

Officers Required for a Corporation

A

MBCA: doesn’t require particular officers but allows corporations to have officers described in bylaws/appointed by directors

Some states: require president and secretary

Generally, officer can hold more than one position

60
Q

Officer Appointment/Removal

A
  • Appointed by board of directors
  • Removed by board of directors
  • If removal in breach of contract, officer entitled to damages
61
Q

Officer authority

A

Actual authority: based on direction by board, articles, bylaws

Apparent authority: to do whatever someone in their position would normally have authority to do

62
Q

Fundamental Corporate Changes; Board CANNOT Act ALONE

A
  1. Amending articles
  2. Transferring/consolidating into another company
  3. Dispositions of substantially all assets (at least 75% of corporations assets)
  4. Converting to another form of business
  5. Dissolving
63
Q

Procedure for fundamental change:

A
  1. Board adopts resolution;
  2. Board submits to SHs with written notice;
  3. Shareholder approval = majority of shares entitled to vote
  4. Articles of the change are delivered to Secretary of State
64
Q

Merger of Corporations

A

Generally, approved by directors and shareholders of BOTH corporations

Exception: parent-subsidiary or when rights of survivor’s shareholders not significantly affected

65
Q

Dissenters Appraisal Rights

A

Shareholders that don’t like a fundamental change may force the corporation to purchase their shares at a fair price if they:

  1. Give corporation notice of intent to demand appraisal rights before vote is taken;
  2. Do not vote in favor of change;
  3. Demand payment after change is approved

*NO appraisal right if company is listed on national exchange OR has more than 2000 shareholders valued at least $20 million

66
Q

Voluntary Dissolution

A

If shares have NOT been issues/business has NOT commenced –> a majority of incorporators/initial directors may dissolve corporation by delivering articles of dissolution to state

After shares issued –> corporation may dissolve by corporate act under fundamental change procedure

67
Q

Administrative Dissolution

A

State may bring an action to administratively dissolve a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent with state

68
Q

Judicial Dissolution

A

AG can seek on ground that corporation fraudulently obtained articles or that it’s exceeding/abusing authority

Shareholders can seek judicial dissolution if:
- Directors deadlocked in management of corporate affairs and shareholders unable to break
- directors have acted in manner illegal, oppressive, fraudulent;
- shareholders deadlocked in voting power and failed to elect one or more directors for a period that includes 2 annual meeting dates;
- Corporate assets being wasted, misapplied, diverted for non corporate purposes

Creditors can seek if:
- corporation admits in writing that claim is due and corporation is insolvent
- creditors claim has been reduced to judgement, execution of the judgment has been returned unsatisfied, and corporation is insolvent

69
Q

Winding up steps

A
  1. Written notice to all creditors and publish notice of dissolution in a newspaper in county of PPB
  2. Gather all assets
  3. Convert assets to cash
  4. Pay creditors
  5. Distribute any remaining sums to SHs, pro rata by share unless there is a liquidation preference

Rule Statements (13 decks)

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