Corporations Flashcards
Corporation: definition
Entity that exists separate from owners, shielding owners and managers from personal liability.
Requirements to incorporate
agent, street address, corporation name, authorized number of shares, name and address of incorporator
De jure v de facto corporation
De jure: all statutory requirements for incorporation met; articles of incorporation signed and filed with secretary of state.
De facto corporation: actual use of corporate power and good faith, but unsuccessful incorporation under valid incorporation statute. LImited liability. State can attack status but not third parties.
Piercing the corporate veil: Definition
Court may pierce corporate veil and disregard corporate entity holding shareholders personally liable as justice requires. Result: active shareholders have personal and several joint liability.
Reasons to pierce the corporate veil:
Alter ego, capitalization, fraud, estoppel.
Purpose of corporation
default - any lawful business purpose unless articles define a specific purpose.
What is the term for corporate acts beyond stated business purpose? Contexts in which this arises?
Corporation has committed “ultra vires” acts. Acts generally enforceable, but may be cited when corporation sues officer, shareholder sues to enjoin
proposed act, state seeks dissolution.
Stock subscription agreements: Pre-incorporation and post-incorporation
subscriber makes written promise agreeing to buy specified number of shares. Post-incorporation subscription: creates contract between subscriber and incorporation. Pre-incorporation subscription: good for 6 months , or all subscribers agree to recovaction.
What are the categories of stock sold or available to be sold?
Available, issued, outstanding
Rules for different classes of stock (common/preferred)
Preferred must state # shares in each class, distinguishing name for class. Rights/preferences/limitations.
Preemptive rights - shareholder
right of existing shareholder to maintain percentage of ownership in corporation when there is new issuance of stock for cash. Modernly, unless articles provide otherwise: no preemptive rights for shareholder.
Who are corporate promoters
Promoters act on behalf of corporation not yet formed.
Liability for acts of promoters
Promoter is personally liable until there has been a novation replacing promotor’s liability with that of corporation, or agreement between parties stating otherwise.
Corporate Management structure
Director - at least 1; articles of incorporation (filed with state to establish corporation, include rules that will gover corporation) bylaws (document governing management of the organization; adopted by board of directors); annual election for board of directors; officers and committees appointed to implement board decisions; officer authority (officer can bind corporation).
Removal of officers/directors
Directors: removed by shareholder vote for any reason unless articles indicate otherwise. Officer: Board can remove with or without case
Rules for meetings of board of directors
Must take place annually. Quorum must be present (majority of board); dissent msut be recorded. Actions w/o meetings ok if all directors sign written consent of an action.
Duties of directors and officers
Loyalty, care, disclosure. Duty of Care: Business judgment rule; act in good faith as reasonably prudent person.) Duty of loyalty (interests of corporation above his own interest - self dealing, usurping corporate opportunity, unfair competition) duty of disclosure (directors and officers must disclose material information to board members)
Rights of directors and officer
compensation, indemnification (D/O entitled for indemnification for expenses incurred on behalf of K, and expenses if he prevails in proceeding brought against him by the corporation); K has discretion to idndemify for unsuccessful proceedings if directors or officers acted in good faith.
Do all shareholders have the same voting rights?
No. The right to vote can be different by type of stock held.
Requirements for action to pass - shareholder meeting
Quorum necessary. Majority of outstanding shares represented (in person or by proxy). .
Shareholder vote calculation methods
straight votes: one vote per share held. Cumulative: # shares held x # directors then cast all votes for one or more directors.
Dividends
Discretionary. Allocated differently with preferred/cumulative/participating
Definition: Direct and Derivative suits
Direct suit: shareholder suit or breach of fiduciary duty owed to shareholder.
Derivative suit: suit on behalf of corporation for harm done to corporation. Corporation gets the recovery, and sh/h gets reimbursement for litigation expenses.
Shareholder duties
General rule: shareholder has no fiduciary duty to corporation or other shareholders. Modern trend: controlling shareholders have fiduciary duty to cporoation and minority shareholders.
Short-swing profits
Section 16(b) provides short swing trading profits received within six month period by corporate insider must be disgorged to corporation. (If corporation has lots of assets or shareholders, or listed on national exchange)
who are corporate insiders for purposes of 16(b)?
Officers, directors, shareholders >10%
insider trading
10b-5 - disallows insider trading and provides liability for any person who employs fraud or deception in connection with purchase or sale of any security.
Sarbanes Oxley
ets standards for publicly traded companies - audit board, senior executivs must take responsibility for accuracy of reports.
Requirements for fundamental changes to corporation
Fundamental changes - merger, share exchange, asset sale, conversion, amendment of articles, dissolution, dissenter appraisal rights) - generally must be approved by majority shareholder vote.(Board resolution–> shareholder notice and vote –> update articles)
Under what circumstances can shareholder inspect books and records?
With written notice/request, for a proper purpose.
What constitutes “proper purpose” for shareholder’s inspection of books and records?
Proper purpose is one that relates to shareholder’s interest in the corporation.
Derivative action - requirements for plaintiff
Shareholder at the time action is filed and when act/omission occurred; plaintiff must make written demand 90 days before filing.
What is the Business Judgment Rule?
The BJR is a rebuttable presumption that insulates directors from liability for decisions that the directors made in good faith and in the best interests of the corporation.
What are the safe harbor rules for self-dealing?
A director’s conflict-of-interest transaction may enjoy protection if (i) the director provided full disclosure of all material facts and the transaction was approved by either a majority vote of disinterested directors or a majority of the votes entitled to be cast by disinterested shareholders, or (ii) the director can show the transaction was substantively and procedurally fair to the corporation.
Who are the owners of an LLC?
Members
Can a non-merchant make a Firm Offer?
No.
