Corporations Flashcards
The Corporate Entity
A corporation is established to raise capital and to protect investors from liability. A corporation is a legal entity that exists separately from its owners, thus shielding owners and managers from liability.
Pre-Incorporation Promoter Liability
A promoter is a person who works to establish a corporation prior to formal inception. They are personally liable for pre-incorporation contracts unless post-formation novation relieves the promoter of that obligation. (Look for a person that forms a corporation then seeks to pass bills and other liabilities to the corporation after formation. These liabilities can be accepted upon vote of the Board).
Formation
A corporation is formed when their Articles of Incorporation are filed with the Secretary of State. (Look for this where typically some attorney will fail to file, somebody will know about it, and somebody will treat the organization as if it was a corporation).
Articles of Incorporation (Aol)
The Aol must contain the name of the corporation, the number of shares the corporation will issue, the address of the corporation’s initial office, the name of its initial agent, and the name and address of each incorporator.
Election of Directors
Shareholders elect directors, and may remove them for any reason, upon vote. The Board of Directors acts to assign the officers of the corporation, as well as the terms of their employment.
Quorum
In order for the Board of Directors to act, they must have a quorum to vote on such matters. A quorum requires that a majority of the Board Members be present to vote.
De Jure Corporation (DJC)
A DJC is a legally formed corporation. A DJC enjoys the protections and benefits off the Corporate Entity, including the protection of the personal assets of shareholders. (Look for the filing of the AOI with the SoS. Failure to file is often the reason you don’t have a properly formed DJC).
De Facto Corporation (DFC)
A DFC is a corporation that failed to be properly established. Persons or companies conducting business with a DFC, that know the DFC is improperly formed, will be unable to later make claims as if the DFC were a proper corporation. (For example, a bank loaning money at a high rate of interest to DFC, knowing they were not properly formed, may not later make claims against the personal assets of a shareholder/officer/partner when the loan is not repaid.)
Corporation by Estoppel
If person treats a business as if it were a corporation, they are unable to later claim that it was not a corporation. (Look for an improperly formed corporation and a third party seeking to sue the individual owners. If you treat the entity like a corporation to earn some benefit, you can’t later sue and say the corporation didn’t exist).
Ultra Vires Acts (UVA)
Where a corporation’s activities are outside the scope of their AoI, such activities are deemed UVAs. (Look for a company that begins doing business in an area outside of their core competency, such as Ford Motor Car getting into the Self-Help Seminar business.) UVAs can subject the corporation to derivative suits from shareholders, where they can sue to prevent the corporation from driving their share price into the ground.
Piercing the Veil
The corporate entity provides that shareholders and directors are typically not personally liable for the debts and liabilities of the corporation. However, certain actions by the company officers may warrant piercing of the corporate veil. This allows creditors to attack shareholders’ assets when: the shareholder, director of officer uses their alter ego (look for a director taking company assets home), when they fail to follow corporate formalities (look for the company that fails to have annual board meetings), I the corporation was inadequately capitalized at formation (at formation only, if they took investor money to build a factory, but now don’t have the capital to commence operations) or to prevent fraud.
Business Judgement Rule (BJR)
The BJR is a rebuttable presumption that a director is acting in good faith and that they reasonably believe their actions were in the best interest off the corporation. This rule provides a measure of comfort to Directors and Officers of corporations, where they will not have their personal assets attacked as long as their actions were reasonably shown to be in the best interest of the corporation.
Duty of Care
Directors have a duty to act in good faith and in the best interests of the corporation, and with the care of a similarly situated person. They are required to be reasonably informed.
Duty of Loyalty
A Director must not engage in a conflict of interest. This duty is established to prevent a director from entering a conflicting transaction, usurping a corporate opportunity for their own benefit, or competing with the corporation.
Duty of Loyalty Avoidance
When a director is faced with a conflicting transaction, the director is not in violation of this duty if they fully disclose the details of the transaction to the board, if it was approved by a majority of disinterested directors or if the director can show that the business transaction was fair to the corporation.
Usurpation of Corporate Opportunity
A corporate opportunity exists if the corporation has an interest in the opportunity, or the opportunity is similar to what the business would typically pursue. A director may only personally engage in this opportunity if the board declines to pursue the opportunity after receiving a full briefing of the opportunity and a vote to decline acceptance. The presenter of this opportunity must recuse themselves from a vote to decline.
Board Meetings
Board action requires a quorum be present at each vote. A majority of the Board is necessary to form a quorum, unless the Aol state a higher or lower number. (At least 1/2 of directors are required to form a quorum, and you need a quorum to secure a valid vote - one of the board members leaves early? No voting is allowed). Additionally, Board Meetings must be conducted at least annually.
Removal of Directors
A director may be removed from the board of directors by court order for fraud or gross abuse of authority, or by a vote of the majority of shareholders for any reason.
Shareholder Meetings
Shareholder meetings are required to take place annually. At these meetings, shareholders will select board members, and may vote on the business of the day. This voting can be done by proxy (through the mail or online) and individual votes can be grouped with other votes by shareholder agreement, thereby leveraging additional voting power.
Dividends
A dividend is the portion of profit paid to shareholders, typically quarterly. A dividend is not a shareholder right, but instead, the Board will vote to pay a dividend or not. In the case that a dividend is not paid, the profit will be classified as retained earnings, and typically used to expand the company.
Voting Agreements
These are agreements between shareholders to pool their votes, thereby strengthening their voting power. These agreements are valid it properly executed, where failure to vote subject to the agreement can be enforced by specific performance.
10(b)(S)
Committing fraud in the purchase or sale of securities. Usually, this involves trading on insider information. This situation typically arises when company insiders (those with non-public information about the corporation) use that information as a basis for the purchase or sale of securities. (For example, a director gets word that their newest drug was denied a sales license by the Food and Drug Administration and immediately sells their shares before the public is informed and the share price plummets).
16(b) Rule
The Short-Swing Profit Rule. This rule is established as a safeguard against persons with large corporate ownership stakes from acting on timely insider information. It requires that any director, officer, or shareholder who owns more than 10% of a corporation surrender any profit earned from the sale or purchase of equity securities purchased and sold within a 6-month period. To be subject to this rule, the corporation must have more than $10 million in assets and at least 2,000 shareholders.
Shareholder Direct Suit
A lawsuit filed by a shareholder against a corporation for personal enforcement of rights.
