Corporations Flashcards
What are the requirements to form a corporation?
File Articles of Incorporation with the state, including:
* Corporate name
* Registered agent & address
* Number of shares authorized
* Incorporator’s name
Articles of Incorporation are essential for establishing the legal existence of a corporation.
When does corporate existence begin?
When Articles of Incorporation are filed, unless a later date is specified
This marks the official start of the corporation’s legal status.
What is an ‘Ultra Vires’ act?
A corporate act beyond the stated purpose in its Articles.
Consequences:
- Shareholders can enjoin the act.
- Corporation can sue directors/officers for damages.
- The state can dissolve the corporation.
What is a ‘De Jure’ corporation?
A corporation that meets all legal formation requirements.
Has full legal recognition and limited liability for shareholders.
What is a ‘De Facto’ corporation?
Exists when a good-faith effort was made to incorporate, but formation was defective.
Protects from personal liability unless state challenges existence.
What is ‘Corporation by Estoppel’?
Prevents a party from denying the corporation’s existence if they treated it as a valid corporation.
What is promoter liability for pre-incorporation contracts?
Promoters are personally liable unless:
* Novation: Corporation assumes liability, and third party releases promoter
* Adoption: Corporation adopts the contract
* Third party only looked to the corporation for performance.
What are a promoter’s fiduciary duties?
Cannot make secret profits on business deals
Must fully disclose transactions to the corporation.
What are the two primary types of stock?
Common Stock: Voting rights, last in line for distributions.
Preferred Stock: Preference in dividends, no voting rights unless specified.
What are shareholder ‘preemptive rights’?
Right to buy new stock to maintain proportional ownership
Must be stated in the Articles of Incorporation.
When are stock subscriptions irrevocable?
Pre-incorporation stock subscriptions are irrevocable for six months unless all subscribers agree otherwise.
Who decides corporate distributions?
Board of Directors (BD).
When are distributions prohibited?
If the corporation is insolvent or the distribution would make it insolvent.
When is a director personally liable for unlawful distributions?
If the director:
* Votes for an improper distribution
* Fails to rely on competent financial information.
What are the two types of shareholder meetings?
Annual Meeting: Required to elect directors.
Special Meeting: Can be called by Board, shareholders with 10% voting power, or others authorized in bylaws.
What notice is required for shareholder meetings?
10 to 60 days’ advance notice (written).
What is the quorum requirement for shareholder meetings?
Majority of voting shares must be present.
What is cumulative voting?
Allows minority shareholders to concentrate votes to elect directors.
What is a voting trust?
Shareholders transfer shares to a trustee who votes on their behalf.
What is a shareholder voting agreement?
A binding contract among shareholders to vote together.
What is a ‘direct action’ by a shareholder?
A lawsuit to enforce personal shareholder rights.
What is a ‘derivative action’?
A shareholder sues on behalf of the corporation.
What are the requirements for a derivative suit?
Standing: Shareholder must have owned stock at the time of the wrong.
Demand: Must demand Board action first (unless futile).
What is the duty of care for directors?
Must act in good faith, with care a prudent person would use.
What is the Business Judgment Rule (BJR)?
Courts presume directors acted in good faith unless fraud, illegality, or bad faith is shown.
What is the duty of loyalty?
Directors cannot put personal interests ahead of the corporation.
What is self-dealing, and when is it allowed?
When a director has a personal financial interest in a corporate transaction.
Allowed if:
* Full disclosure and disinterested Board approval
* Fair transaction.
What is the corporate opportunity doctrine?
A director cannot take a business opportunity that the corporation has an interest in.
Who elects corporate officers?
Board of Directors.
What authority do officers have?
- Actual: Defined by bylaws/Board;
- Implied: To perform duties associated with the office;
- Apparent: If the corporation holds them out as having authority.
What approvals are required for mergers?
Majority of both Board of Directors & Voting Shareholders must approve.
What is an asset purchase?
One company buys another’s assets but does NOT assume liabilities.
What are dissenting shareholders’ appraisal rights?
Right to force the corporation to buy their shares at fair value.
When will courts pierce the corporate veil?
To hold shareholders personally liable if:
* Corporation is undercapitalized
* Corporate formalities ignored (alter ego)
* Corporate assets used for personal use
* Fraud or injustice results.
What is a close corporation?
Few shareholders, no public stock trading.
What is an S Corporation?
Pass-through taxation
Limited to 100 shareholders, all must be individuals.
What is a benefit corporation?
For-profit, but also pursues a social or environmental goal.
How can a corporation dissolve voluntarily?
Board proposes dissolution, shareholders approve.
What are grounds for involuntary dissolution?
Shareholder deadlock
Illegal/fraudulent acts by directors
Assets being misused.
