Corporations Flashcards
De Jure Corporation
Created when its owners properly submit articles of incorporation to the relevant state department; the effective date is the day the articles are filed unless a delayed effective date is specified in filing
What must the articles of incorporation include?
- Corporation’s name (i.e., it must be distinguishable from other business entities) and some indication that it is a corporation
- Number of shares the corporation is authorized to issue
- Address of the corporation’s office and name of its registered agent within the state
- Incorporators’ names and addresses
Are bylaws required?
Yes, by state law
What do bylaws do?
Provide rules for a corporation’s internal governance and must not conflict with the articles of incorporation
What must the bylaws include?
- Description of the powers and duties of the corporation’s primary officers
- The number of directors who will serve on the board
- Processes the directors must follow to act (e.g., meetings and voting procedures)
- Processes the shareholders must follow to act (e.g., meetings and voting procedures)
De facto corporation
Protects signatories from being personally liable on any corporate Ks with third parties, even if the corporation was defectively formed, if the incorporators:
- Proceeded in good faith (i.e., an honest and reasonable belief that a corporation was formed)
- Under a valid incorporation statute
- For an authorized purpose
- Executed and acknowledge articles of incorporation pursuant to that purpose
Corporation by estoppel
The doctrine that provides that if a third party contracts with an entity honestly believing it was a corporation, the third party is estopped from denying the entity’s incorporation in an action that arises out of that K or course of dealing.
It protects people from personal liability who sign Ks on behalf of corporations that are nonexistent due to a mistake in the incorporation process
How is stock issued?
The articles of incorporation must state the cumber of shares the corporation is authorized to issue and the board must approve the issuance of stock.
In some states, the shareholders may authorize the issuance of stock if it is permitted in the articles of incorporation
Consideration for stock
May include tangible or intangible property or some other benefit to the corporation such as cash, promissory notes, services performed, contracts for future services, or reduction in liabilities
Outstanding shares
Shares of stock authorized and issued by the corporation are outstanding until they are reacquired, redeemed, converted, or canceled
Reacquired shares
Stock reacquired through repurchase or redemption are deemed
authorized but unissued.
The articles of incorporation may authorize the reissuance of
reacquired shares, but if reissuance is not permitted, then the number of authorized shares is reduced by the number of reacquired shares
Types of stock
Common stock and preferred stock
What benefits does common stock confer on the owner?
- The right to cast one vote on any matter submitted to the stockholders for a vote
- The right to receive a dividend when declared by the corporation’s board of directors
- A proportional share of the corporation’s assets in liquidation
Preferred stock
Stock that carries special rights (e.g., special dividends, priorities in receiving distributions, the right to cast more or less than one vote per share, or a greater or lesser
proportional share of the corporation’s assets in liquidation)
Can preferred stock be converted into another security?
Yes, preferred stock may be converted into another security (i.e., a financial
instrument that normally represents an investment in a business) at the holder’s option
Preemptive rights
Sometimes a corporation’s articles of incorporation will grant shareholders the option to buy shares in a future issue of common stock before the shares are offered for sale to the public
How are dividends distributed?
The board of directors enjoys broad discretion over when to make cash distributions; if a board decides to make a distribution, then it must treat all shareholders in the same class of stock equally
Record date (dividends)
The board may set a record date for purposes of issuing a dividend, meaning that only those who owned stock on that date are entitled to receive the dividend
Limitations on distributions
A corporation may not make a distribution if it would:
- Render the corporation unable to pay its debts as they come due in the usual course of business (i.e., cash flow insolvency); or
- Result in a reduction of the corporate assets to less than the sum of its total liabilities, including contingent and prospective liabilities (i.e., balance sheet insolvency)
Personal liability (distributions)
A director who votes for or assents to a distribution in excess of what
lawfully may be made is personally liable to the corporation for the amount of the distribution that exceeds what could have been lawfully distributed
Repurchases
The board of directors may choose to use corporate funds to purchase shares that belong to one or more of the corporation’s stockholders; share buybacks need not be offered to every
stockholder
Redemption rights
A stockholder may enter into a contract with the corporation that requires the corporation to repurchase the stockholder’s shares in the future
Where can share transfer restrictions be found?
May be written into (1) the articles of incorporation, (2) the bylaws, (3) an
agreement among shareholders, or (4) an agreement between shareholders and the corporation
When are share transfer restrictions enforceable?
These restrictions are valid and enforceable against a transferee (1) with actual or constructive knowledge
(i.e., restrictions must be noted on the stock certificate, or the corporation must provide written notice), (2) as long as they are used for a reasonable purpose
