Corporations Flashcards
Three things it takes to form a corporation:
- People
- Papers
- Act
People: Incorporators. What do they do?
Execute the articles of incorporation and deliver them to the secretary of state.
Paper: Articles of Incorporation. What are they?
- A contract between corp. and SH, and
2. A contract between corp. and state.
What is required in the Articles of Incorporation (at minimum) NARIA - 5
Name of corp
Authorized Shares
Registered Agent, name and address (in GA)
Incorporators, names and addresses
Address of the principal office (can be anywhere)
What if articles have no statement of the corporation’s duration?
Corp existence is presumed to be perpetual.
What if articles have no statement of corps purpose?
Corp can do all lawful business.
If you see a statement of purpose in the articles then look for ultra vires activity.
Ultra vires activity:
Business beyond the scope of the articles.
Modern practice of handling ultra vires activity: (Three things)
- Ultra vires K are presumed valid.
- SH can seek an injunction
- Responsible managers are liable to corp for UV losses.
Authorized stock:
Max number of shares corp can sell described in the articles of incorporation
Issued and outstanding stock:
Number of shares that the corp ACTUALLY sells and have not been reacquired by corp.
Authorized but unissued:
Shares that have been reacquired by the corp.
De Jure corporation:
When a corp has successfully completed all the legally required steps to be incorporated.
Incorporators execute the articles and deliver them to GA Sec of State. If Sec files the articles this is:
Conclusive proof of valid formation.
Rights of a corporation:
Separate legal person.Can sue and be sued. Hold property, be a partner in a PS, make charitible contributions, pay income taxes, etc.
Are directors or officers liable for what corp does?
Generally not.
Are SH liable for what the entity does?
Generally not.
Limited liability:
SH only liable for the price of their stock.
GENERALLY who is liable for what the corporation does?
The entity itself. This is part of the benefit of incorporating.
S Corp characteristics
No more than 100 SH, all of whom are human, and US citizens or residents. There is only one class of stock and it is not publicly traded.
Anyone asserting a de facto corp defense must be:
UNAWARE of failure to form de jure corporation.
De Facto Corp requirements (3)
- There is a relevant incorporation statute
- The parties made a GOOD FAITH, COLORABLE attempt to comply with it, and
- Some exercise of corp privileges
GA HAS ABOLISHED THIS DOCTRINE WITH RESPECT TO PEOPLE WHO KNOW THE ARTICLES HAVE NOT BEEN FILED.
Hypo: Incorporators put together the proper documents and mail them to the secretary of state, UNBEKNOWNST to them, the docs are lost in the mail. Meanwhile, the business is being operated as a corp and enters a contract. Are SH liable on the K?
Yes, b/c all they have is a PS, UNLESS the ct applies the de facto corp. doctrine.
Corp by estoppel:
One who treats a business as a corp may be estopped from denying that it is a corp.
Corp by estoppel only apply in what kinds of cases?
K - NOT torts.
Promoter:
A person acting on behalf of a corp that is not yet formed.
Pre-incorp K liability for corp:
A corporation is NOT liable on pre-incorporation K’s until it adopts the K.
What two ways can a corp adopt a contract?
- Express. Board of directors adopts. OR
2. Implied. If corp accepts the benefit of the K.
Liability of Promotor:
Unless the K CLEARLY PROVIDES otherwise, the promotor REMAINS liable on pre-inc K until there has been a NOVATION.
Novation:
Agreement b/t promotor, corp, and the other contracting party that corp will replace the promotor under the K.
If a Corp adopts a contract it:
Adoption makes the corp. liable as well, but promotor is not released from liability until a NOVATION occurs.
What happens to a foreign corp that fails to get a certificate of authority in GA? (2)
- Civil fines.
2. It cannot assert a claim in GA.
Issuance:
When corp sells its own stock.
Subscription:
WRITTEN OFFERS from subscribers to buy stock from corp.
How long after pre-incorp subscriptions are offered do they remain irrevocable?
Six months. (Unless all subscribers agree to revocation.)
Are post-incorporation subscriptions revocable?
Yes, up until acceptance.
At what point are the corp and the subscriber obligated under a subscription agreement?
When the board accepts the offer.
Forms of consideration permitted for issuance of stock?
ALMOST EVERYTHING. Very broad.
“Any tangible or intangible property or benefit to the corp.”
Amount of consideration:
Determined by the board as long as it its “adequate”.
Pre-emptive rights:
Right of a SH to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY.
If articles are silent on the subject of pre-emptive rights, do we have them?
No.
*Exception: in a “statutorily close corp” pre-emptive rights may exist unless the articles say they do not.
HYPO: C Corp articles provide for pre-emptive rights. You own 20% of stock. C Corp issues stock to Peggy to purchase property from Peggy. Do you have pre-emptive rights?
No. B/c this is not an issuance for money - it’s an issuance for property.
Statutory requirements for number of directors:
One or more adult humans.
Election of directors:
Initial directors can be named in articles or elected by incorporators. Thereafter, SH elect directors at the annual meeting.
How can SH remove directors before their terms expire?
If a majority of shares entitled to vote actually vote to remove.
On what basis can directors be removed from office? Also, staggered v. not staggered board?
With or without cause unless there is a staggered board - with a staggered board only can be removed with cause.
Two ways the board of directors can make decisions:
- Unanimous agreement in writing, or
2. Passing a resolution at a meeting which must satisfy quorum and voting requirements.
HYPO: Suppose the directors agree through individual conversations that the corp will do something.
That act is VOID unless ratified by a valid act.
Does a conference call count as a board meeting?
Yes.
Is notice required for regular board meetings?
No.
Is notice required for special board meetings?
Yes. Two days notice of time and place.
Can directors give proxies or enter voting agreements for how they will vote as DIRECTORS?
No. These are void. Directors have a non-delegable fiduciary duty.
Quorum for meetings of the board:
Must have a majority of all directors.
Quorum can be broken.
Duty of Care Standard: A director must discharge her duties in: 3-ish
(burden is on P)
GOOD FAITH
as to what she believes to be in the BEST INTERESTS of the corp. and
with CARE that an ORDINARILY PRUDENT PERSON in like position in similar circumstances would use.
2 ways a director may breach a duty of care:
- Nonfeasance: The director does nothing.
2. Misfeasance: The board does something that hurts the corporation.
A director is not liable for misfeasance if:
she meets the business judgment rule.
Business judgment rule: Decision is made: (3)
- In good faith
- was informed, and
- had a rational basis.
What constitutes an interested director transaction (3 things)
- The corp must actually enter the transaction,
- The director must know of the deal and of her interest,
- The deal is b/t the corp and the director, a member of the director’s household, or another business of the director.
Business judgment rule never apples when:
there is a conflict of interest (duty of loyalty cases)
Interested director transactions will be set aside or the director will be liable in damages UNLESS (one of two things)
- The deal was fair to the corp. when entered, OR
2. her interest and the relevant facts WERE DISCLOSED and the deal was approved in one of two ways.
Interested director deals can be approved in one of two ways:
- Majority (at least two) of the disinterested directors actually vote, or
- Majority of all disinterested shares vote.
Competing ventures are allowed but they cannot breach standard (care and loyalty). Making plans to compete is probably okay but it is unfair to: 2.5 things
divulge corp info or to steal customers or employees.
Corporate opportunity:
A legitimate interest or expectancy in a deal AND the corp can afford to act on it.
When can a director act on a corp. opportunity w/o usurping it? After he has: 2 things
- told the board, and
2. waits for the board to reject the opportunity.
Board members will not be held liable if: (3)
- Absent from meeting where malfeasance took place.
- There was good faith reliance on info presented by member of board or corp.
- Members that objected to the business put dissent IN WRITING.
What duty of care and loyalty to corp do the OFFICERS owe?
The same as the directors.
Officers are AGENTS of the corp - so:
They can bind the corp by acts which they have the authority to bind it and corp may be liable for torts under respondeant superior.
Selection and removal of officers is done:
by the board.
Shareholders hire and fire directors, but the board:
hires and fires officers. Generally, the SH do not hire and fire officers.
Lawsuits: When is a corp barred from indemnifying a director or officer?
No reimbursement is allowed if she were held liable on the basis of improper financial benefit.
Lawsuits: When MUST a corp indemnify director or officer?
If she is wholly successful on the merits in defending a suit. When she wins an judgment on the entire case.
When MAY a corp indemnify an officer or director? This usually happens in settlement, but eligibility is based on: 2
- her acting in good faith and
2. with the reasonable belief that her actions were in the co.’s best interests.
What liability can the articles NOT limit or eliminate for directors? 4
- Intentional misconduct,
- Usurping corporate opportunities
- Unlawful distributions, or
- Improper personal benefit.
A close corporation is: 3
- Stock is not traded on a public exchange,
- SH can authorize the elimination of the board, and
- They can run the corp.
Piercing the Corporate Veil may render:
SH in close corps personally liable for actions of the corporations.
Piercing the Corp. Veil requires: 2
- SH abused the privilege of incorp., and
2. Fairness must require holding them liable.
Reasons why cts will pierce corp veil: To avoid: 3
- Fraud,
- Evasion of K or tort responsibility, or
- Evasion of public policy.
Shareholder derivative suits:
SH suing to enforce the CORPs claim, not her own personal claim.
If SH P wins the derivative suit, who gets the money?
What does SH P receive?
The corp.
Costs and attorney’s fees, usually from the corp.
If SH P loses derivative suit can SH still collect attorney’s fees?
No.
Requirements for a SH derivative suit: 3
- The person bringing the suit must have owned stock at the time the claim arose or have gotten it by operation of law.
- Adequate representation of corp interest
- Must make a written demand on the board that corp bring suit.
SH Voting: Who votes:
The ‘record SH’ as of ‘the record date’
Proxies: (4 elements)
- Written,
- Signed by record SH,
- Directed to sec. of corp.
- Authorizing another to vote her shares.
How long are voting proxies good for?
11 months unless stated otherwise.
Requirements for voting trust: (4)
- Written trust agreement
- Transfer legal title of share to voting trustee;
- Transfer of legal title is recorded with corp; and
- Original SH receives trust certificates and retain all shareholder rights except for voting.
Maximum time limit for voting trust:
10 years.
Requirements for voting agreement: 2
- In writing,
2. Signed
Annual SH meetings are held to:
elect board of directors.
Special SH meetings can be called by:
the board or at least 25% of the voting shares.
Or anyone else authorized w/ the bylaws.
Hypo: 25% of shares call a meeting to remove an officer. Okay?
No. It is not a proper SH purpose b/c SH do not remove officers.
Notice requirement: Who must it be given to and when?
Every SH entitled to vote for every meeting and must be delivered b/t 10 - 60 days before the meeting.
Contents of the notice: 3
- When
- Where
- Why.
Only business included in the statement of purpose can be transacted at the meeting.
What happens if the corp fails to give notice to one of its SH?
Any act at the meeting is void unless those not given notice waive the defect.
How can waiver of notice occur? 2 ways
- Express : In writing and signed at any time.
2. Implied : SH attended the meeting w/o objection.
Quorum:
Determined by number of shares. Generally requires a majority of outstanding shares.
Routine material that any SH has right to access must be demanded:
In writing at least five business days before inspection. Not necessary for a SH to say why she wants the docs.
More sensitive material any SH may make demand but she also needs:
A proper statement of purpose for inspection and it must be related to SH interests.
Three types of distributions:
- Dividends.
- Repurchase of SH stock.
- Redemption (forced sale.)
When is a distribution made?
Only at the board’s discretion.
In what order do shareholders get dividends? (4 from first to last)
Preferred -> Participating -> Cumulative -> Common
Preferred stock means:
Pay first.
Cumulative dividends:
Accrue from year to year.
When CAN’T a corp make a distribution?
If it is insolvent or if the distribution would render it insolvent.
Insolvent: 2 ways
- Corp is unable to pay its debts as they come due, or
2. Total assets are less than total liabilities.
Directors are joint and severally liable for improper distro, when?
If declaring was negligent, reckless, or intentional - NOT strict liability.
Dissenting SH right of appraisal.
SH right to force corp to buy stock for fair value in the event of a fundamental corp. change.
Actions of corp that trigger dissenting SH right of appraisal: (4)
- Some amendment to the articles;
- Merger;
- Disposition of substantially all assets not in the ordinary course of business; or
- Transfer of share in a share exchange.
When is dissenting SH right of appraisal NOT available?
If the stock is listed on a nat’l exchange or has more than 2,000 shareHOLDERS.
What does SH have to do to perfect her right of appraisal? (3)
- Before SH vote, file w/ corp written notice of objection and intent to demand payment;
- Abstain or vote against proposed change; AND
- After the vote, w/i time set by corp, make written demand to be bought out and deposit stock with the corp.
A present SH can petition the ct for involuntary dissolution of a corp because of: (4)
- Director deadlock causing irreparable harm to the corp.;
- Waste of assets;
- Failure at 2 consecutive annual meetings to fill vacant board positions, or
- 20% of the outstanding shares petition because of illegal, oppressive, or fraudulent acts by the directors.
4 steps in winding up (liquidation of) a corp:
- Gathering all assets,
- converting to cash,
- paying creditors, and
- distributing remainder to SH, pro-rata by share unless there is a liquidation preference.
Rule 10b-5 prohibits:
fraud or misrepresentation in connection with the purchase or sale of any security.
At some point the deal must use an “instrumentality of interstate commerce” - using the phone is enough.
10b-5 Transactions (3)
- Misrepresentation of material information
- Insider trading
- Tipping
Insider trading:
Trading securities based on insider information.
Section 16B applies to speculation by:
directors, officers, and ten percent SH - strict liability.
Duty of Loyalty can be breached in four ways:
(Burden of proof on D) 4
Conflicts of interest
Corporate opportunity doctrine
Engaging in a competing business
Insider trading
When the board is held liable for something members that object must put their dissent in writing. What does in writing mean? (3 ways)
- The minutes,
- Delivered written response to the presiding officer at the meeting, or
- Written dissent to the corp immediately after the meeting.
A corp MAY indemnify an officer or director? in settlement, but eligibility is determined by: 3
- Disinterested directors,
- disinterested shares, or
- independent legal counsel.
What’s the maximum duration of a voting agreement?
20 year max, renewable up to 25.
Articles of incorporation: What information is required regarding incorporators?
Names and addresses
Articles of incorporation: What information is required regarding agents and officers?
Names and addresses - they must be in GA.
Articles of incorporation: What information is required regarding offices?
The address of the principal office (usually the HQ) it can be anywhere.
Articles of incorporation: What information is required regarding capital structure? (3)
- Authorized stock,
- number of shares per class, and
- information on voting rights and preferences of each class.
If no annual SH meeting is held w/i _____ SH can petition ct for injunction.
15 mo.
Who can be liable for insider trading?
Someone whose job gives them access to secrets. Such a person has a duty to abstain and disclose.
“One w/ a relationship of trust and confidence w/ the SH.”
