Corporations Flashcards
Memorize Approaches/Understand Concepts/Nuances
What is the Approach to Corporations?
FORMATION
PROMOTER LIABILITY
PIERCING CORP. VEIL
AUTHORITY OF OFFICER
DUTIES OF OFFER/DIRECTOR
SHAREHOLDER RIGHTS
CHANGES TO CORPORATION
SECURITY LAW
Formation
-> Before formation - Promoter
-> Shady Shareholders - PCV
-> Shady Contracts - Officer Authority or Officer/Director Duties
——> Shareholders Rights - Direct/Derivative Suit
-> Change to Corp - Procedures
-> Security Violations - 10b-5/Insider Trading/16b
What is De Jure?
AOI filed with SOS + Lawful Corp. Purpose… substantial compliance sufficient for de jure.
De Jure refers to a corporation that is legally recognized and compliant with statutory requirements.
What is De Facto?
Good faith, colorable attempt to comply w/ statute formalities + validly conduct business as if valid corporation, “unaware of invalid corporation” formalities.
De Facto status provides some protections even if the corporation is not fully compliant.
What is Estoppel in the context of corporations?
Parties acting as if they are corporation are estopped from denying liability in contract.
This means that if parties behave as if a corporation exists, they cannot later deny the existence of that corporation.
What is the liability status of LLC members?
Members have limited liability, not personal liability, but are liable for LLC obligations.
This means members are protected from personal liability for debts and obligations of the LLC.
What is a Professional Corporation (Prof. Corp.)?
Licensed professional may incorporate as PC… personal liable for own malpractice only.
This allows professionals to limit liability for corporate debts but not for their own professional negligence.
What defines a Close Corporation in California?
35 or less shareholders, and article “close corp.” Managed by shareholders, no corporate formalities.
Close Corporations have fewer regulatory requirements and are often more flexible in management.
What is Promoter Liability?
Promoter enters into pre-incorporation contracts on behalf of corp… are jointly and severally liable.
Promoters can be held personally liable until the corporation is officially formed and adopts the contracts.
How can a promoter be relieved from liability?
Only by novation; agreement to substitute new party.
Novation is crucial for transferring liability from the promoter to the corporation.
What is ‘Piercing the Corporate Veil’?
Shareholders may be jointly and severally liable to creditors based on Unity of Interest + Injustice or Fraud.
This legal concept allows creditors to go after shareholders’ personal assets under certain circumstances.
What constitutes Unity of Interest in PCV?
Alter ego, commingling, failure to observe corporate formalities, inadequate capitalization.
These factors demonstrate a lack of separation between the corporation and its owners.
What is required for a corporation to issue Par Value Stock?
Any valid consideration may be received for PVS if BOD believes in good faith its worth at least that.
This ensures that the corporation receives adequate value for its stock.
What are the duties of Directors and Officers (D&O)?
Election/Removal, Duty of Care, Duty of Loyalty.
D&O must act in the best interests of the corporation while fulfilling their responsibilities.
What is the Business Judgment Rule?
D&O must perform their duties in good faith, informed judgment, not lacking GF, unadvised, gross negligence.
This rule protects D&O from liability for decisions made in good faith and with reasonable diligence.
What actions are prohibited under the Duty of Loyalty?
Self-dealing, conflict of interest, usurping corporate opportunities.
D&O must not benefit personally at the expense of the corporation.
What is a Derivative Suit?
A lawsuit brought by a shareholder on behalf of the corporation.
This type of suit is used when the corporation fails to act on a wrongdoing.
What is required for a merger in California?
D and majority s/h of both corps must approve, unless; Parent corp owning 90% subsidiary corp no need approval of D or s/h of sub corp.
This simplifies the merger process for majority-owned subsidiaries.
What is the significance of Rule 10b-5?
Prohibits anyone from using interstate commerce to defraud or make false statements of material fact in connection with purchase or sale of any security.
This rule is critical for maintaining integrity in securities transactions.
What is Insider Trading?
An insider breaches Rule 10b-5 by trading on inside information.
This illegal practice undermines public confidence in financial markets.
What are the elements of 10b-5 violation (approach)
Elements: IFCRD
When the judge asked him, why he helped his friend violate 10b-5 during Christmas, while studying for the bar… he replied:
“I FUCKIN CANT REMEMDER DECEMBER” (scienter)
Interstate Commerce: Private plaintiff, used Phone, mails, etc to deal security.
Fraudulent Conduct - Misstatement/Misrepresentation/or Omission that breaches fiduciary duty. (See below)
Materiality & Scienter - “reasonable investor test” and “intent to deceive… or at least reckless”
Causation - P actually bought or sold security.
Reliance - Plaintiff relied on statement…. Or omission.
Damages - Monetary or Constructive Trust
What is par value stock?
Par value stock is a type of stock that has a nominal value assigned to it, which is often set at a minimal amount, such as $0.01 per share.
What is watered stock?
Watered stock refers to shares that are issued for less than their par value.
