Corporations Flashcards
1
Q
Comparing the Partnership and the
Corporation
A
- Formal creation
- Harder to dissolve
- Centralized management
- Limited Liability
- Transferability
- Tax Status
1. C Corporations are double taxed
2. S Corporations are not double taxed if you can qualify for status
2
Q
Why a company would be formed in Delaware
A
- Default rules
- Predictable and established case law
- Judges who specialize in corporate law
- Management friendly
- What all the cool companies are doing
3
Q
Why it matters where a company is formed
A
State of organization controls the law of the internal affairs of the company or the “family law” of the company
4
Q
State of incorporation
Chief Executive Office/Headquarters
A
- No foreign business registration
- Address for service of process
- Fees
5
Q
Key Players in a Corporation
Shareholders/Stockholders
A
Owners;
they hold the equity
6
Q
Charter is also called
A
Articles of incorperation
7
Q
In the charter, you cannot take someone elses
A
name
8
Q
Key Players in a Corporation
Board of Directors
A
are selected by the Shareholders to manage the
Corporation’s big decisions and policies
9
Q
Key Players in a Corporation
Officers
A
are selected by the Board of Directors to run the day-to-day operations of the Corporation
* Also referred to as executives or c-suite
10
Q
Key Players in a Corporation
Employees
A
the civil servents of the corporation
11
Q
Charter
A
- Required document. Can be amended as needed by the Board of Directors AND the
Shareholders - Public
12
Q
Charter can be amended as needed by
A
the board of directors and shareholders
13
Q
Need in a charter
A
-can be barebones
- name of corporation
- name and address of incorperators
- registered agent name and address
- some states like delaware require corperate purposem
- Authorized stock: list amount of stock to sale, par value
14
Q
Name of corporation
A
- Has to have an indication of the corporate form: corporation, incorporated,
limited, company or an abbreviation - Can’t take a name someone is already using
15
Q
Amending the charter takes a
A
vote
16
Q
Bylaws
A
lay out ground rules for hoe corp is run
17
Q
Unless it has to be in charter, it can be in
A
bylaws
18
Q
What has to be in the charter if you want it
A
- Limitation or elimination of personal liability of directors/officers for breaches of fiduciary duties, subject to limitations (model act only allows for directors, not officers)
- cumulative voting
- allowing the board of directors to amend bylaws (default for the model act)
- Preemptive rights for the model act
19
Q
Signing the charter
A
- State filings have to be signed (DGCL §103)
- Conformed signature vs Electronic
20
Q
corporations
Meeting of Initial Directors
A
- Initial Directors or Incorporators who will elect Initial Directors (MBCA)
- Approve/Adopt
1. Charter
2. Corporate administrative items
3. reimburse incorperators and adopt contracts
4. bylaws
21
Q
Bylaw examples
A
- Rules for calling and conducting meetings (of shareholders and directors)
- Written Consents
- Number of directors
- Method of electing and removing directors
- Manner in which board vacancies are filled
- Committees
- Indemnification and Expense
Advancement - D&O Insurance
- Duties, appointment and removal of officers
- Share certificates
- Mechanisms for amendment (but see DE charter)
22
Q
Initial Meeting of Shareholders
A
- Shareholders will have a meeting to elect their
choice of actual directors. - Shareholders will have regular annual meetings on a
go forward basis.
23
Q
Corporations
Directors
A
- Need at least 1 by statute
- Has to be a living, breathing person
- Number of directors determined in manner set forth in
charter or bylaws
24
Q
When corp’s make money from stock
A
when they sell and issue the stock
25
Common Stock
* Basic ownership interest
for every corporation
* Charter sets out amount,
rights and obligations
* Amount is arbitrary
* Company only makes
money if it issues stock
26
Perferred Stock
- has options
- you have some kind of prefrence to common stock
- company must pay perferred amount before paying other stock holders
27
Liquidation and stock holders
Allows perferred stock holder to be getting money back before stock holder, if multiples (2x, 3x) get that x amount of their money back
28
Perferred Stock- Prefrences
- paid first, liquidation, voting
- dont need to have all 3
29
perferred stock owner voting prefrences
- depends - none, same, better
- choose a director
- veto rights on certain actions
30
Peferred Stock- Inceptions
Multiple tiers of perferred stock
31
Preferred Stock - Participation
* Participation = getting
seconds
* Getting back in line
with the common
stockholders
32
Preferred Stock - Conversion
* Convertible
* Preferred way or trade in for common stock
* Mandatory vs. optional
* Conversion ratio
33
Preferred Stock – Preemptive Rights
Right of existing
stockholders to
purchase newly issued
stock before it is
offered to outsiders.
| Ex. Liquidation
34
MBCA on Preemptive Rights
* Don’t have it unless the charter says so.
- Unless specified otherwise, shareholders can waive their
preemptive rights
- Unless specified otherwise, shares issued as compensation
don’t count.
35
Promoters and agency
Not agency becuase no principal
36
Who is a promoter?
* A promoter is someone who helps to found and organize a corporation.
* Enter into contracts for goods or services to be
provided to the corporation once it is formed
37
A person who makes a deal with a promoter will still be responsible for that deal even if a corperation takes it over, unless
a new deal (novation) is made
38
When does a pre-incorporation contract become an obligation of the corporation?
a. Expressly or impliedly adopts it
b. Implied if corporation accepts the benefits with knowledge of the contract
39
.In addition to the corporation adopting a pre-incorporation contract, what has
to happen to release the promoter from liability?
a. Novation = replacing obligations of the promoter with the obligation of the corporation
b. Creditor (Stern) has to consent to the substitution
40
When is consent to the substitution by the creditor inferred?
a. Acceptance of part performance by the new obligor IF performance is made with the
understanding that a complete novation is proposed
41
DIfference between Ratification and Adoption
1. Adoption: from moment on, does not time travel
2. Corps can only adopt not ratify to before didnt exist
42
Are promoters agents of a corporation?
Promoters are not agents because they don’t have a principal that exists.
43
Are corporations liable for pre-incorporation torts of the promoter?
The corporation is not liable for pre-incorporation torts of the promoters because the promoter is not an agent.
44
Is the corporation liable for pre-incorporation contracts?
Only if it adopts the contract. It implicitly adopts the contract if it accepts the benefits with knowledge of the contract
45
If the promoter signs in the name of the to be formed corporation and the 3rd party knows that the corporation didn’t exist when it entered into the contract, is the promoter still liable?
1. courts are split
2. Model Act: persons acting for “corporation,” knowing that incorporation hasn’t happened, are jointly and severally liable for liabilities
46
If the corporation adopts the contract, does the promoter remain liable?
Yes, unless there is also a novation. The outside party/creditor has to agree to substitute the corporation for the promoter. Agreement can be implied by acceptance of part performance by the new obligor IF performance is made with the understanding that a complete novation is proposed.
47
Can a corporation ratify pre-incorporation contracts?
No, a corporation can only adopt pre-incorporation contracts. They can’t ratify them because they didn’t exist when the contract was made.
48
Ways to protect promoters
1. Instead of a contract, get
an offer the corporation
can accept once formed
2. look to the corperation for indemnification
49
effective date of the charter
Unless you specify otherwise, filing will be the effective date
50
DE: Filing =
- prima facie evidence of full existence.
- Have to get it right to fully exist
51
MBCA: Filing =
conclusive proof the corporation exists.
52
De Jure vs De Facto
* De Jure is legal, fully formed
* De Facto is treated as a corporation even though it wasn’t formed properly
53
De Facto Corporation Elements
* (1) statute that permits incorporation
* (2) bona fide or good faith attempt to incorporate and
* (3) actual use or exercise of corporate privilege
54
No corporation of this State and no person sued by any such
corporation shall be permitted to assert
| DGCL
the want of legal
organization as a defense to any claim
55
Difference
between De Facto
Corporation and
Corporation by
Estoppel
Attempt to incorperate v. conscious decsion of the 3rd party
56
Promoters can be liable in
contract
57
A defacto corperation exists if
a good-faith effort to organize the corperation is made and there is an actual exercise of corperate powers
58
Preferred Stock - Relative
Goes first before common stock
59
6 points on Preferred Stock
1. Relative
2. Prefrences
3. Convertible
4. Multiple Series
5. Presumptive Rights
60
Defacto Corperation Elements under Common Law
1. Statute that permits incorperation
2. bona fide or good faith attempt to incorperate and
3. actual use or exercise of corperate privledge
61
3 doctrines of Corporations by Estoppel under common law
* (1) Corporation may not avoid a contract based on defective incorporation.
* (2) A 3rd party may not avoid a contract with a corporation based on defective incorporation.
* (3) Shareholders retain limited liability if a 3rd party understands the contract to be with the corporation
62
If the promoter signs in the name of the to be formed corporation and the
3rd party knows that the corporation didn’t exist when it entered into the
contract, is the promoter still liable?
a. Courts are split (Goodman compared to Company Stores Dept. in Note 5)
b. MBCA §2.04 – persons acting for “corporation,” knowing that
incorporation hasn’t happened, are jointly and severally liable for
liabilities
63
# MBCA Defective Incorporation
Unless a delayed effective date is specified, the corporate
existence begins when
when the articles of incorporation are filed
64
# MBCA Defective Incorporation
All persons purporting to act as or on behalf of a corporation,
knowing there was no incorporation under this Act, are
jointly and severally liable for all liabilities created while so acting
65
# Defective Incorporation
After Revisions to the Model Act
* No more defective corporation
* Change to corporation by estoppel
* (1) Corporation may not avoid a contract based on
defective incorporation.
* (2) A 3rd party may not avoid a contract with a corporation
based on defective incorporation.
* Shareholders WHO DIDN’T ACT FOR THE CORPORATION OR
DIDN’T KNOW IT HASN’T BEEN FORMED retain limited
liability if a 3rd party understands the contract to be with
the corporation
66
# Delaware on Defective Corporation
The corporate existence begins in Delaware upon
the filling of a signed certificate of
incorporation in accordance with Delaware law.
67
# Delaware on Defective Corporation
The filing of the certificate by the Secretary of State constitutes only
“prima facie evidence”
of legality. (DGCL §105)
68
# Delaware on Defective Corporation
DGCL §329(a) codifies the first and second branches of the corporation by estoppel doctrine.
* (1) Corporation may not avoid a contract based on defective incorporation.
* (2) A 3rd party may not avoid a contract with a corporation based on defective
incorporation.
- Delaware would presumably accept the third branch of the corporation by estoppel doctrine
as well.
69
# Delaware on Defective Corporation
Delaware accepts the de facto corporation doctrine as a matter of
common law
70
Who can bring ultra vires actions is limited
* Proceedings by shareholder(s) against the corporation as long as the shareholder(s) didn’t participate in the action
* Corporation against officers or directors
* The state
71
When Ultra vires is used
* when actions have no benefit to the corporation
* When actions would have been, within the power of the corporation, but is void or voidable due to a failure of authorization
72
# Delaware and Ultra Vires Provisions
A corporation may be incorporated or organized under this chapter to conduct or promote
any lawful business or purposes, except as may otherwise be provided by the Constitution or other law of this State.
73
# Delaware and Ultra Vires Provisions
Inherent powers every corporation has
* Make contracts, sue and be sued, adopt bylaws, appoint officers, etc.
* Make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof
74
# Delaware and Ultra Vires Provisions
The board (and shareholders if their approval was
needed for the action) can ratify
defective corporate acts
75
# MBCA Ultra Vires Provisions
The board (and shareholders if their approval was needed for
the action) can ratify
defective corperate act
76
# MBCA Ultra Vires Provisions
Default purpose is any lawful business unless
a more limited
purpose is set forth in the articles of incorporation
