Corporations Flashcards
Corporations
Legal entity separate from its owners
Characteristics of corp
Management, limited liability, transferability, continuity, personhood
Management
Centralized BoD who delegate day to day to corporate officers
Limited Liability
Only corp itself is liable
Transferability
Shareholders can freely transfer ownership interest unless prohibited
Continuity
Exist in perpetuity
Personhood
Considered people and retain certain constitutional protections
Articles of Incorporation Must Include
Name, shares including max number authorized to issue, and name and address of registered office and agent
Some states also require statement of purpose, which cannot be exceeded
Bylaws
Written rules for managing corp and provide for ordinary business conduct like elections, times for meetings, etc.; can also contain provisions for managing and regulating corp’s affairs if legal
Must be incorporated by incorporators or BoD
Amending bylaws
Shareholders can amend initial bylaws
Promoter
Pre-incorporation action that are on behalf of not yet formed corporation for capital commitments, usually by forming Ks with parties interested in becoming shareholders, and corp planning and formation
Promoter Liability
Promoter liable for Ks entered into on behalf of not-yet-formed corp and remains liable after unless (a) novation, or (b) indemnification if held liable on K after formation
Pre-incorp liability of corp
Generally, no liability based on pre-incorp Ks entered into by promoters unless corp adopts K
Subscription Agreement
One agrees to buy specified number of shares from corp at given price
Ultra Vires Act
Where corp acts outside stated purpose
Consequence of Ultra Vires Act
(A) shareholder suit to enjoin
(B) corp suit against officer or director responsible
(C) state action to dissolve corp
De facto corp
Where corp formation fails to adhere to proper formalities but carries itself as corp, may still be treated as one
Reqs for de facto
(1) corp law exists under which entity could have become legally incorporated
(2) good faith effort to comply with state’s incorporation laws, and
(3) business acted like corp
Corp by estoppel
Persons who treated business as corp are estopped from denying entity is corp, especially if to avoid liability
Piercing corporate veil
Generally, shareholders, directors, and officers are not personally liable but can be held under this doctrine in which case corp entity disregarded
Acts justifying piercing
(1) ignoring corp formalities to extent corp is not being treated as separate entity
(2) inadequate capitalization where under capitalization at time of incorporation
(3) fraud or illegality, either already exists or to prevent
Liability post-piercing
All persons composing corp may be personally liable, but only those involved in active management will be held liable
Corp security
Corps get funding through issuing securities of which there are two (1) debt, and (2) equity
Debt security
Bonds
Corp borrows funds from outside creditor and promises to repay
Holders of bonds have no ownership interest
Equity securities
Stocks
Instrument that represents investment in corp and shareholders become part owners
Types of shares
Authorized: max number that corp can issue, as in incorporation articles
Issues/outstanding: shares sold to investors
Reacquired: shares that corp buys back, reverting from issued to authorized
Classes of shares
Corps may choose to issue different classes and each can have different series within class
Reqs for class of shares
Articles must authorize each class and set forth
(1) number of shares in each
(2) name or distinguishing designation
(3) describe rights, preferences, and/or limitations afforded to each class
Varying rights in shares
Shares authorized by corp can have different rights, preferences, and limitations depending on class of shares which could include rights to distribution or dividends, nature of voting rights, etc.
Distribution Rights
Corp can distribute assets in form of dividends, redemption of shares, or liquidation upon dissolution
This is up to board discretion, no general right to demand
Consideration
Shares can be issued by corp in exchange for any tangible or intangible property or benefit to corp
Shareholder Authority
Exert control through power to elect directors, amend bylaws, and approve fundamental changes
(A) directors: remove and elect
(B) bylaws: amend or repeal
(C) fundamental: must approve, including mergers, sale of assets outside ordinary business, and dissolution
Inspection rights with proper purpose
Shareholders may inspect corp’s books and records for any proper purpose upon written notice
Proper purpose: if reasonably related to person’s interest as shareholder
Notice: 5 days provided to corp, stating purpose
Inspection rights without proper purpose
Allowed if articles and bylaws, annual reports and meeting minutes, BoD resolutions of share classifications and corp communications
Meetings of shareholders
Corp must hold annual meetings for election directors and other special matters
Notice of meeting must be sent to shareholders eligible to vote
Special meetings by shareholders
May be called to conduct business requiring shareholder approval
Shareholder voting
Unless articles provide otherwise, 1 share = 1 vote and quorum is required to begin a vote
If votes cast within quorum favored action then action approved
Shareholder voting in BoD elections
Directors are elected by plurality
Cumulative: allowed if in articles each share can cast as many votes as BoD vacancies and multiple votes can be cast for one seat
Proxies
Shareholders can vote shares via proxy IF executed in writing but generally revocable unless coupled with interest and clear statement that not revocable
Shareholder lawsuits
May sue corp either directly or through derivative action to enforce corp’s rights
Direct suit
Occurs where corp, its officers, or director caused harm to, or breached duty owed to, a particular shareholder and recovery is for benefit of shareholder or its class
Derivative suit
Shareholder sues to enforce corp’s rights when corp has cause of action but fails to pursue
Derivative suit requirements
Standing: shareholders at time of alleged wrong
Written demand: by shareholder to corp required, and then must wait 90 days before suing unless (i) corp already rejected demand, or (ii) irreparable harm
Recovery: goes to corp, shareholder may get legal costs
Director’s response and authority
Corp BoD generally responsible for corp affairs and management
BoD characteristics
Number of directors: based on bylaws or articles, at least one
Election: elected by shareholders at annual meeting
Removal: with or without cause unless provided for differently in articles
Delegated authority
BoD does not run day-to-day of corp but rather delegates to officers and executives
Committee
BoD may created, each comprised of 1+ BoD with power to oversee corp affairs but cannot make major corp decision without full BoD consent
Duty of care
Directors and officers owe corp fiduciary duty of care and in determining whether duty was breached, courts apply Business Judgment Rule
Business judgment rule
Courts will not second guess poor or erroneous decision made by officer/director IF decision was made
(1) in good faith
(2) with care that person in like position would reasonably believe appropriate under similar circumstances, and
(3) in manner director/officer reasonably believed to be in best interests of corp
Liability of director/officer
If director/officer breaches duty of care, held personally liable for damages
Articles can limit but exceptions include (a) intentional violations of criminal law, (b) unlawful corp distributions, (c) receiving unentitled financial benefits, or (d) intentionally inflicted harm on corp or its shareholders
Duty of loyalty
Directors/officers owe duty of loyalty which prohibits them from profiting at expense of corp
Arises in scenarios of conflict of interest or usurpation of corp opportunity
Safe harbors for conflict of interest
Officer/director with potential conflict of interest will not be personally liable if transaction is either (a) fair to corp given circumstances existing at time, or (b) approved after material facts have been disclosed by either disinterested shareholders, or majority of disinterested BoD members
Corporate opportunities
Fiduciary duties prevent officers/directors from diverting business opportunity to themselves where (a) corp would have interest or expectancy, and (b) officer/director does not give corp an opportunity to act first
Mergers
Occurs when 2 or more companies combine
One company may be absorbed or new company entirely can be created
Reqs for merger approval
Mergers considered fundamental corp changes and, as such, generally require each corp to get approval of by (a) board, by whatever vote authorized, and (b) shareholders, votes for exceed against
Exception to merger approval
No significant change to surviving corp so no need to approve
Effect of merger
Surviving corp owns all property and assumes all obligations of prior separate entities
Short form merger
Where parent corp owns more than 90% stock of subsidiary, can be merged without approval of either corp’s shareholders
Dissenters’ rights
Can challenge merger or demand payment for shares at fair value
Must be mutual notice to dissent and, then, if approved, corp must pay dissenters fair market value for their shares
Dissolution
Termination of corp’s existence, which means corp continues to exist only to wind up and liquidate
Can be voluntary (fundamental change), administrative brought by state, or judicial via AG or shareholders
Disposition of property
Where corp sells, leases, or otherwise disposes of all—or substantially all—property outside regular course of business
Considered fundamental change
LLC
Entity that allows for taxation for its owners like partnership but limited liability similar to corp
Formation of LLC
Certificate filed with state needing name, address of registered office, and name and address of registered agent
LLC operating agreement
Government document like corp’s bylaws that govern relations between members, rights and duties of members and managers, conditions for amending operating agreement, etc.
Presumptions of LLC
All members manage
Equal voting rights
Operating agreement dictates distribution
Type of LLC management
Member-managed
Manager-managed
Duties of LLC members
Member-managed: all members owe duties of care and loyalty to each other and LLC
Manager-managed: only managers owe duties of loyalty and care to LLC and members
All members and managers: good faith and fair dealing
