Corporations Flashcards
Usurpation of corporate opportunities
Whenever the facts of a question mention that a director learns of a business opportunity, be sure to consider
whether their corporation would be interested. If so, they must present the opportunity to their corporation and can take advantage of it person- ally only if the corporation decides not to pursue it. If the corporation is not given a chance to take advantage of the opportunity, the director can be forced to turn over the opportunity and/or any profits derived from the opportunity to the corpo-
ration.
Interested director transactions
if a director will benefit from a transaction their corporation is about to enter into, the director must disclose this information to
the board or to the shareholders. Disinterested directors or the shareholders must then approve the transaction. If there is no disclosure, the transaction can be set aside unless it is fair to the
corporation.
Do shareholders get to manage the corporation?
If the examiners question you about the power of the shareholders to run the day-to-day affairs of their corporation, you should generally respond that the shareholders have no such power; that power is vested in the board of directors, and the
shareholders have the power to elect the board. But note: Shareholders in nonpublic corporations can agree to run the corporation in any manner they desire, such as eliminating the board and running the corporation in the same manner as a
partnership would be run.
Regular issues vs.
fundamental changes: Distinguish shareholder
vote required
on fundamental changes-regular issues can be approved by a majority of the shares present at a meeting, as long as there is a quorum, whereas a fundamental corporate change must be approved by two-thirds of all outstanding shares entitled
to vote-not just those represented at a meeting.
When can the corporate veil be piereced
- the entity has a certificate of incorporation
- corporate formalities have been ignored and injustice has resulted
- the corporation was inadequately capitalized
- it is necessary to prevent fraud
If a corporate veil is pierced what happens
The shareholder can be held personally liable to corporate obligations
What must an article of information include
- Description of authorized shares and preferences, if any
- Registered agent and office
- Names and addresses of incorporators
- Name of corporation (must indicate corporate status)
Liability of promoted on preincorporation contract
For there to be a valid contract, someone must be bound with the third party. It can’t be the corporation, because it doesn’t exist; therefore the promoter is liable even though they were acting on behalf of the corporation to be formed. (If the agreement ex- pressly relieves the promoter of liability, it will be
treated as an offer to the corporation.)
Persons who purport to act on behalf of a corporation knowing there was no valid incorporation are jointly and severally liable
If court pierces:
Generally only active shareholders liable
Generally liable only for tort obligations
Removal of officers
Virginia allows the shareholders to remove an or all of the directors, with or without cause, at a meeting called expressly for that purpose, unless the articles of incorporation provide otherwise. The notice of the meeting must specify that the purpose of the meeting includes the removal of one or more directors; and it must be given not less than 10 or more than 60 days prior to the meeting. If the articles do not provide for cumulative voting, it is not permitted. A majority of the shares entitled to vote at an election is sufficient to remove a director. However, if the director was elected by a class of shares, a majority of that class is required.
What happens if a director breaches their duty and the corporation does not want to remedy
Directors owe their corporation fiduciary duties and must act in a manner that is in the best interest of the corporation using their best business judgment. If a director breaches this duty and the corporation does nothing to remedy the breach, a shareholder can demand that the board take action. If the board does not take action, the shareholder may file a shareholder derivative suit.
Under the Virginia Stock Corporation Act, a corporation must notify shareholders of the date, time, and place of each annual and special shareholders’ meeting. Such notice generally must be given no less than
nor more than
meeting date.
10 days; 60 days
Which of the following business associations is a hybrid business entity offering all of its owners the limited liability enjoyed by corporate shareholders and the flow-through tax treatment of a partnership unless the owners choose otherwise?
Limited liability company
Under the Virginia Stock Corporation Act, a corporation’s articles of incorporation may provide for a lesser or greater quorum requirement for shareholders as long as the change is not less than
of the shares eligible to vote.
One-third.
Under the Virginia Stock Corporation Act, an appointment of a proxy is valid for __________ months unless a longer period is expressly provided in the appointment form.
11 months
Under the Virginia Stock Corporation Act, where the corporation has 35 or fewer share-holders, the holders of at least
of all votes entitled to be cast on any issue proposed to be considered at a special meeting may make a written demand for such a meeting.
20%
Under the Virginia Stock Corporation Act, in which of the following types of proceedings may the ultra vires nature of a corporate act be raised?
A proceeding against the corporation before the S.C.
What is a promoter?
A promoter is a person who undertakes to form a corporation and procure rights, instrumentalities, and capital for it
Promoters act on behalf of a corporation not yet formed.
What are the two ways a corporation can adopt a preincorporation contract?
- Express board resolution
- Implied ratification through knowledge and acceptance of benefits
The act of incorporation alone does not constitute adoption.
When does a corporation become liable on a promoter’s preincorporation contract?
When it adopts the contract by express resolution or implied ratification
All contracts entered into on behalf of a corporation before incorporation can only become its contracts by adoption.
Under what condition is a promoter personally liable for a contract?
If the contract expressly provides for the promoter’s liability
The corporation will not assume that liability even if it adopts the contract.
What relieves a promoter from all liability regarding a contract?
A novation, which is an agreement among the promoter, the corporation, and the other contracting party
This agreement allows the corporation to replace the promoter under the contract.
What fiduciary duty do promoters have?
Promoters have a fiduciary duty to each other, the corporation, and the shareholders
They cannot make a secret profit on dealings with the corporation.
What must a promoter do to avoid liability for profits made on sale to the corporation?
- Disclose all material facts to an independent board
- Ensure the transaction is adopted by all current shareholders
- Be the sole shareholder with no plan to sell stock to others
If there is a plan to sell stock to outsiders, disclosures must be made until financing is complete.
What profits can be recovered by a corporation from a promoter?
Profits from sales made after becoming a promoter or profits that exceed fair market value from property acquired before becoming a promoter
Profits are recoverable only if sold for more than fair market value.
What is the duty of promoters towards each other?
Promoters have a duty to deal fairly and disclose material facts to one another
They are treated as joint venturers.
What happens to expenses incurred by a promoter before organization?
The promoter has no right against the corporation for those expenses
If the corporation is never organized, the promoter must return all money to subscribers.
What are blue sky laws?
State laws that compel full disclosure of material facts and restrict a promoter’s profits
Federal securities laws also require disclosure of promoters’ activities if a corporation files a registration statement.
Who are subscribers?
Subscribers are persons or entities who make written offers to buy stock from a corporation not yet formed
They enter into subscription agreements.
What is the nature of a subscription agreement?
A subscription agreement is a continuing offer that becomes enforceable only upon acceptance by the corporation
Acceptance typically occurs through a resolution of the board.
How long is a subscription entered into before incorporation irrevocable?
For 6 months unless the agreement provides otherwise or all subscribers agree to revocation
This means that subscribers cannot withdraw their offer during this period.
What is a de jure corporation?
A corporation exists de jure if it complies with the incorporation procedures specified in the statute.
What are the major requirements for incorporation?
The major requirements include incorporators, contents of articles, registered agent and office, details of incorporators, and name of corporation.
Who can act as incorporators?
One or more persons act as incorporators and file the articles of incorporation with the S.C.C.
What must the articles of incorporation include regarding authorized shares?
The articles must include a description of the authorized shares, meaning the maximum number of shares the corporation is authorized to issue.
What is required if shares are divided into classes?
The articles must include the number in each class, a distinguishing designation for each class, and a description of the preferences assigned to different classes of stock.
What are the requirements for a registered agent?
The registered agent must be a Virginia resident who is either an officer or director of the corporation or a member of the Virginia bar, or a corporation authorized to transact business in Virginia.
What must the name of the corporation include?
The name must include the word ‘corporation,’ ‘company,’ ‘incorporated,’ or ‘limited,’ or abbreviations of these words.
What happens if the articles of incorporation are amended?
Articles of amendment must be filed with the Commission.
What is the purpose of the organizational meeting?
The organizational meeting is held to adopt bylaws, elect officers, and transact any other business.
What must bylaws be consistent with?
Bylaws must be consistent with the articles of incorporation.
What is the legal significance of forming a corporation?
It’s a misdemeanor to do business as a corporation in Virginia unless organized as a corporation.
What is the entity status of a corporation?
A corporation is a separate legal person and is considered a person for purposes of due process and equal protection.
What is limited liability?
Shareholders are generally not personally liable for the debts of the corporation; they are liable only for the price of their stock.
What are de facto and estoppel corporations?
There are no de facto and estoppel corporations in Virginia; a corporation with an effective certificate of incorporation constitutes a de jure corporation.
What does ‘piercing the corporate veil’ mean?
Creditors may hold active shareholders personally liable when the courts believe justice will be served by preventing fraud or unfairness.
What are common scenarios for piercing the corporate veil?
Common scenarios include alter ego, undercapitalization, and misuse of corporate form.
What is the corporate purpose in Virginia?
Every Virginia corporation has the purpose of engaging in any lawful business unless restricted by the articles or statute.
What are the major statutory powers of a corporation?
Each corporation has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs.
What is ultra vires?
Ultra vires refers to a corporation acting outside its stated purposes, which can be challenged under specific grounds.
What is a foreign corporation?
A foreign corporation is one incorporated outside Virginia and must qualify to transact business in Virginia.
What are the consequences of a foreign corporation not qualifying?
It will be subject to a modest fine and cannot initiate a suit in Virginia courts.
What are preemptive rights?
A preemptive right is the right of an existing shareholder to maintain their percentage of ownership by buying stock whenever there is a new issuance of stock for cash.
When do shareholders have preemptive rights?
Shareholders don’t have preemptive rights unless the articles provide otherwise.
What is the nature of stock in Virginia?
Stock is intangible personal property.
Can Virginia corporations issue shares without certificates?
Yes, if a subsequent written statement is sent to the shareholder.
What governs the issuance and transfers of stock?
Article 8 of the Uniform Commercial Code (UCC).
What is a complete defense for the issuer regarding certificated securities?
Lack of genuineness (forged certificate).
Is a defective issuance of a certificated security a defense?
No, it is not a defense for a purchaser for value without notice.
What happens if a corporation overissues stock?
The defective stock will not be treated as valid; the corporation must purchase valid stock or repay the purchaser.
What rights does a purchaser of a certificated security acquire?
The rights their transferor had or had power to transfer.
What defines a ‘protected purchaser’?
A purchaser who gives value without notice of any adverse claim and obtains control of the security.
What is required for a registered certificated security transfer?
Eligibility of the person seeking registration, appropriate indorsements, and reasonable assurance of genuineness.
What must the true owner do to obtain a replacement for lost securities?
Request before the issuer has notice of a protected purchaser, file a sufficient indemnity bond, and satisfy other reasonable requirements.
What are the requirements for enforcing stock transfer restrictions?
The restriction must be valid under Virginia’s corporation law and comply with UCC notice provisions.
What is the minimum number of directors required for Virginia corporations?
At least 1 member.
Who elects the directors of a corporation?
Shareholders.
What is the maximum term for elected directors?
3 years.
Can shareholders remove a director before their term expires?
Yes, with or without cause.
How can a director resign?
By delivering written notice of resignation to the board or specified officers.
What is required for directors to conduct business at a meeting?
A quorum, which is a majority of all directors.
Can directors vote by proxy?
No, they cannot vote by proxy.
What is the business judgment rule?
A presumption that directors manage the corporation in good faith and in its best interests.
What duty does a director owe to the corporation?
A duty of care.
What is self-dealing in corporate governance?
When a director receives an unfair benefit in a transaction with their own corporation.
What is required for independent approval of a transaction involving a director’s interest?
Disclosure to the board or shareholders, and majority approval by disinterested directors or shareholders.
What are the prohibited actions of directors under statutory standards?
Voting for or assenting to illegal dividends or asset distributions.
What is mandatory indemnification?
A corporation must indemnify a director for expenses incurred in successfully defending against a proceeding.
What happens if a director is held liable to their own corporation?
The corporation may never indemnify that director.
What is prohibited indemnification in a corporate context?
A corporation may never indemnify a director who’s held liable to their own corporation.
What is mandatory indemnification?
A corporation must indemnify a director who is wholly successful in winning a suit against any party, unless the articles provide otherwise.
What conditions must be met for permissive indemnification?
The director must have acted in good faith, believed their conduct was in the corporation’s best interest, and had no reason to believe their conduct was criminal.
What are the ways a corporation can grant permissive indemnity?
- A majority vote of a quorum of disinterested directors
- A majority vote of a committee of at least 2 disinterested directors
- A majority vote of shares held by disinterested shareholders
- A special legal counsel’s opinion
What is the purpose of an advance for expenses?
The corporation may pay for or reimburse the expenses of a director in advance of final disposition if the director agrees to repay the advance if they are not successful.
Can an accused director apply for a court order regarding indemnification?
Yes, the accused director may apply to a court for an order for advancement, reimbursement, or indemnification.
What is the limitation on liability of officers and directors in derivative proceedings?
The damages assessed may not exceed the lesser of: (1) the monetary limit specified in the articles or bylaws; or (2) the greater of $100,000 or the amount of cash compensation received during the 12 months preceding the act.
What must a shareholder demonstrate to bring a derivative suit?
- Owned stock at the time of the act or omission
- Fairly and adequately represent the corporation’s interests
- Made a written demand on the corporation
What happens if the directors refuse to bring suit after being requested?
The shareholder may not maintain the derivative suit unless they can show that the refusal was in bad faith or an abuse of discretion.
What are the consequences of a successful derivative suit?
Recovery goes to the corporation and recovery against an individual director is capped at $100,000 or the past 12 months’ cash compensation, whichever is greater.
What is required for a derivative action to be settled or discontinued?
It generally requires court approval and shareholders must be notified if they will be adversely affected.
Who has the right to vote at a shareholder meeting?
Only the record shareholder as of the record date has the right to vote.
Define record owner and record date.
- Record owner: the person shown as the owner in corporate records
- Record date: a voter eligibility cut-off date, not set for more than 70 days prior to the meeting.
