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
2
Q
What is included in the Articles of Incorporation?
A
- Name of corporation
- Name and address of each incorporator and registered agent;
- Number of authorized shares
- (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
3
Q
Organizational Meeting
A
- Adopts initial bylaws
- Appoints officers
If directors named in articles –> BOD hold organizational meeting
If initial directors NOT named –> incorporators hold organizational meeting
4
Q
Internal Affairs Doctrine
A
Internal affairs of a corporation are governed by the law of the state of incorporation
5
Q
Doctrines to raise if incorporators thought they formed an organization but failed to do something effectively in formation?
A
- De Facto Corporation
- Corporation by Estoppel
Can prevent liability be person acting on behalf of corp.
some states do not recognize these jurisdictions
6
Q
De Facto Corporation
A
- Colorable compliance with the incorporation statute;
- Exercise of corporate privilege (acting as though there was a corporation)
7
Q
Corporation by Estoppel
A
People treating the business as a valid corporation are estopped from denying the corporation’s existence
8
Q
Pre-Incorporation Contracts by a Promoter (person acting on behalf of corp.)
A
Corporation can be come liable on these contracts if:
- Express adoption: board takes action adopting the K
- Implied adoption: corporation accepts benefit of the K
promoter will be personally liable until novation occurs
9
Q
Debt vs. Equity Securities
A
Debt securities = bond
Equity securities = stock
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
11
Q
Watered Stock
A
Occurs when value of stock is issued for less than it’s par value
12
Q
MBCA Approach to Stock Price
A
Eliminates par and determined value based on appropriate board evaluation made in good faith
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
14
Q
How does Board of Directors take action?
A
Act as a GROUP by:
- Unanimous agreement in writing
- At a meeting that satisfies the quorum and voting requirements
*acts are void otherwise, unless ratified
*directors cannot give proxies
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
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
17
Q
Committees (created by board) cannot take the following actions:
DFR
A
- Declare distribution
- Fill board vacancy
- Recommend a fundamental change to SHs
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).
19
Q
Duty of Care can be breached
A
- Nonfeasance
- Misfeasance
*burden on plaintiff/challenger
20
Q
Nonfeasance
A
Director does nothing; doing nothing has CAUSE loss to corporation
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)
22
Q
Breach of Duty of Loyalty
A
- Self Dealing
- Competing Ventures
- Corporate Opportunity/Expectancy
*burden on defendant/BJR does not apply
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
24
Q
Self Dealing transaction will be upheld when
A
- Was approved by majority of disinterested directors upon disclosure of ALL material facts
- Judged by circumstances, it was fair
If improper –> can enjoin, set aside, sue for damages
25
Competing Ventures
Directors can engage in unrelated business, but engaging in a directly competing business can breach duty of loyalty
26
Corporate Opportunity/Expectancy
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
27
Director Duty to Disclose
Duty to disclose material corporate information to other members of the board
28
Officers
Agents of the corporation
- Owe same duties of care/loyalty
- Selected and removed by board
- Board sets officer compensation
29
NO Indemnification for Directors/officers/Employees when
Corporation cannot indemnify a director who:
1. Is liable to the corporation;
2. Held to have received an improper benefit
30
Corporation MUST indemnify directors/officers that:
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
Corporation MAY indemnify (permissible) when:
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
Shareholder special fiduciary duty in close corporation
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
Shareholders
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
Record Shareholders
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
Shareholder meeting notice
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
Exceptions to Record Date
1. Treasury Stock
2. Death of SH
3. Voting by Proxy
4. Voting Trust
36
1. Treasury stock = authorized but unissued
If stock was not outstanding on the record date, then no one gets to vote this stock.
37
Death of SH
Executors of SH can vote
38
Voting by proxy
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
Voting Trust
- 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
Shareholders get to vote on
1. Electing Directors
2. Removing Directors
3. Fundamental corporate changes
*REMOVING OFFICER = NOT A SHAREHOLDER ITEM*
41
Shareholder Quorum
Majority of outstanding shares entitled to vote, unless articles/bylaws require a greater number
- Shareholder quorum NOT lost if people leave meeting
42
Shareholder Straight vs. Cumulative Voting
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
Shareholder management agreements
1. Used in small corporations
2. may agree to run the corporation in any way
3. Can even dispense with board
44
Shareholder share transfer restrictions
1. Generally, freely transferable
2. Shares may conspicuously provide for restriction
3. Restrictions must be reasonable
45
Shareholder inspection rights
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
Shareholder preemptive right
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
Shareholder derivative suit & how is SH entitled to bring derivative suit?
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
Shareholder direct action
Suit to enforce the right of a shareholder
Recovery in direct suit --> goes to SH themselves
49
Shareholder liabilities
Not fiduciaries; may act in self-interest
Exception: controlling SH cannot use control to obtain special advantage at expense of minority shareholders
50
Distributions
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
Insolvency Limitation on Distribution
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
Shareholder Distributon - Preferences
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
Piercing Corporate Veil
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
Director Liability related to Distributions
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
Common Scenarios for Piercing the Corporate Veil
1. Alter Ego Docrine
2. Inadequate Capitalization at Inception
3. Perpetrating a Fraud/Avoiding Existing Obligations
56
Alter Ego Doctrine
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
Undercapitalization
Corporation is inadequately capitalized; at time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities
58
Fraud/Avoiding Existing Obligations
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
Officers Required for a Corporation
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
Officer Appointment/Removal
- Appointed by board of directors
- Removed by board of directors
- If removal in breach of contract, officer entitled to damages
61
Officer authority
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
Fundamental Corporate Changes; Board CANNOT Act ALONE
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
Procedure for fundamental change:
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
Merger of Corporations
Generally, approved by directors and shareholders of BOTH corporations
Exception: parent-subsidiary or when rights of survivor's shareholders not significantly affected
65
Dissenters Appraisal Rights
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
Voluntary Dissolution
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
Administrative Dissolution
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
Judicial Dissolution
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
Winding up steps
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
