Corporations Flashcards
1
Q
Corporations
- Promoters
- Defined
- Duty generally
A
- Promoter - Person who directly or indirectly takes initiative in founding and organizing the business or enterprise of the issuer.
- Fiduciary - Promoters owe a fiduciary to other promoters and the corporation.
a. Cannot make secret profit in dealing with corporation.
b. Subject to rules against self dealing.
2
Q
Corporations
- Promoter Liability to obligations
A
- A promoter is jointly and severably personally liable on contracts he enters into on behalf of the corp. to be formed unless the third party clearly agrees to contract with another party and not hold promoter liable.
3
Q
Corporations
- Promoter
- Corporation adoption of contract obligation
- Continued promoter liability
A
- A corporation becomes liable only when it adopts the contract. An adoption may occur by:
a. Express adoption, usually be board of director’s resolution.
b. Implied adoption, Usually through knowledge of the contract and acceptance of its benefits. - A promoter remains liable on the contract adopted by corp. until there has been a novation.
4
Q
Corporation
- Promoter liability
- Novation
A
- A promoter remains liable on a contract adopted by the corp. until there has been a novation.
- Novation - Agreement between promoter, corp. and the contracting party that the corp. will replace the promoter as the party to the contract
5
Q
Corporation
- De Facto Corporation
A
- Business fails to achieve formal corporate status. Treated as a corporation. Organizers made a good faith effort in effort to comply with formation statutes. Organizers have no knowledge of the lack of corporate status.
6
Q
Corporation
- Piercing the Veil
A
- Court may disregard the corporate entity and hold the owners personally liable when required to avoid fraud or unfairness.
- When facts tend to show that the corporation is merely an alter ego of the owner.
7
Q
Corporation
- Piercing the veil
- Common situations
A
a. Failing to observe corporate formalities, rather treats corporation as part of owner’s overall activities.
b. Undercapitalization - Where corporation has insufficient capital to cover foreseeable liabilities.
c. Clear use of corp. form for fraud or misconduct
8
Q
Corporations
- Piercing the veil
- Factors
A
a. Control - Personal decision making and control by defendant.
b. Capitalization - including insurance.
c. Siphoning funds.
d. Lack of director function
e. Commingling and use of funds for defendant’s individual obligations.
9
Q
Corporation
- Shareholder Liability
- Below par or adequate value stock sales
A
- A shareholder is liable to pay full consideration for the shares held.
- If shares issued below par value, directors or shareholder can be held liable.
- If no par value on stock, any valid consideration can be received if deemed adequate by the board.
10
Q
Corporations
- Preemptive Rights
- Articles
A
- The right given to existing shareholders to maintain an existing percentage of ownership by buying stock when there is a new issuance of stock for cash.
- Preemptive rights only exist if expressly granted in the Articles, and to the extent given in Articles.
11
Q
Corporations
- Right to vote shares general
A
- The shareholder of record on the record date is entitled to vote the share at a meeting.
- Record date - The voter eligibility cut off date set by the board can be set on any day within a 70 day period leading up to the meeting date.
12
Q
Corporation
- Meetings
- Notice to shareholders
A
- The corporation must hold an annual shareholder meeting and may hold special meeting for special purpose.
- Special meeting may be called by board of directors, president, shareholders holding 10% or more of stock, or anyone authorized in articles.
- Notice - Must be given not less than 10 or more than 60 days before the meeting.
13
Q
Corporation
Voting Mechanics
- Quorum
- Approval vote
A
- Meeting must be represented by a quorum of shares either in person or by proxy.
- Quorum - A quorum is represented if a majority of shares is present.
- Vote - If quorum exists, action is approved if the votes cast in favor exceed the votes cast against. Not all shares must vote.
14
Q
Corporations
Voting mechanics
- Proxies
- Requirements
A
- Proxy - Shareholder can give another person the right to vote the shareholder’s shares.
- Requirements
a. Must be in writing
b. Must be signed by record holder
c. Must be sent to secretary of corp.
d. Must authorize another to vote.
e. Valid no more than 11 months
15
Q
Corporation
- Proxy
- Revocability
A
- A proxy is generally revokable even if labeled irrevocable.
- Irrevocable requirements
a. Labeled irrevocable.
b. Proxy coupled with an interest. - Interest - Usually created by proxy having given consideration for the shares or having security interest.
16
Q
Corporation
- Derivative Suit
- Requirements
A
- Derivative Suit - Shareholder is suing to enforce the corporation’s cause of action.
- Requirements
1. Must have ones at least one share of stock when claim arose. Usually must maintain ownership through entire litigation
2. Shareholder who brings suit must fairly and adequately represent the corporation.
3. Must make demand on board to cause corp. to bring suit; must be rejected or at least 90 days pass.
17
Q
Corporation
- Director Duties
- General
A
- Directors have a duty to manage the corporation, and may delegate to a committee of one or more board members to recommend action.
- Fiduciary - Directors owe to the corporation fiduciary duties of due care and loyalty.
- Due care - Director must act with the care that a prudent person would use in managing a like business of their own, and
- in a manner directors reasonably believe in best interest of corp.
- IN - director failure must constitute willful misconduct or recklessness, not neg.
- Articles - May limit the liability for lack of care, but not loyalty.
