Corporations

Question 1

What are the three components needed to form a Corporation?

And what makes up those components?

Answer 1

People, Paper, and an Act are need to form a Corporation.

People: Incorporators

• 2 or more
• Incorporators execute the articles, and deliver them to the secretary of state
• Can be a person or entity

Paper: Articles of Incorporation–a contract between the corporation and the shareholders, and a contract between corporation and state. Need–

• Corporate name: Needs “Corp.”, “Company”, “Inc.”, or “Limited” with its name
• Name and address of each incorporator
• Name of registered agent, and address of the registered office (must be in GA)
• Address of the principal office (or HQ), which may be anywhere.
• Corporation can have perpetual existence, and its purpose can be all lawful business
• Capital structure

Act: Incorporators execute articles and deliver them to the GA Secretary of State, along with a certificate of request to publish the corporation’s formation–this is conclusive proof of valid formation

• Once done, there is a De Jure Corporation
• Then Corp has board meet, select officers, and adopt any bylaws and conduct appropriate business

Question 2

How did we handle ultra vires activity (activity beyond scope of Articles) at common law, and how do we handle it today?

Answer 2

At common law, any ultra vires contract could be voided as beyond the corporation’s capacity

Today:

• Ultra vires contracts are valid
• Shareholders can seek an injunction
• Responsible managers are liable to the corporation for ultra vires losses

Question 3

What is the basic capital structure of a corporation? What must the articles contain about stock?

Answer 3

1) Capital structure:
- Authorized stock: Maximum number of shares the corporation can sell
- Issued stock: Number of shares the corporation actually sells
- Outstanding stock: Shares that have been issued and not reacquired by the corporation.

2) Articles must show the authorized stock, the number of shares per class, and information on voting rights and preferences of each class

Question 4

Does GA law always govern the internal affairs of a GA corporation?

Answer 4

YES, even if the company does business in Hawaii or Alaska–the business affairs doctrine

Question 5

How is a corporation held liable and taxed?

Answer 5

Corporation is a separate legal person–can sue and be sued, hold property, be a partner, make charitable contributions, and pay income taxes.

• Are directors/officers liable for what corp does? NO
• Are shareholders liable for what corp does? NO
• How can a corp avoid paying income tax? Form an S-Corp instead of a C-Corp

Question 6

What is required to form a De Facto Corporation?

Corporation by Estoppel only applies in what kind of cases?

Answer 6

1) There is a relevant incorporation statute
2) The parties made a good faith, colorable attempt to comply with it
3) Some exercise of corporate privileges

Corporation by estoppel applies only in contract case, NOT tort cases

Question 7

What are rules regarding Bylaws?

Answer 7

Bylaws: Not a requirement but corps usually have them for internal governance. Completely internal

• Adopted by Board of Directors or Incorporators
• Can be amended or repealed by Board OR Shareholders
• ->But Articles can reserve this power to SHs only
• If Bylaws and Articles conflict, Articles always win

Question 8

Liability for Pre-Incorporation Contracts?

Answer 8

Corporation: Not liable on pre-incorporation contracts UNTIL it adopts the contract
-Can be express through Board action, or implied

Promoter: Unless the contract clearly provides otherwise, the promoter remains liable on pre-incorporation contracts until there has been a novation
-Novation: agreement that the corporation will replace the promoter

Question 9

What is a foreign corporation, and what is required to qualify as one?

Answer 9

A foreign corporation is one formed outside GA–if it transacts business inside GA, it must qualify and pay certain fees

• Transacting business means the regular course of intrastate business
• To qualify, it needs a certificate of authority from the GA SoS. Must appoint a registered agent in GA and pay fees
• If it fails to qualify within 30 days of transacting business,:
• -> There’s a civil fine
• ->Cannot assert a claim in GA

Question 10

What is involved in the issuance of stock? How is it acquired, and what rights attach?

Answer 10

Issuance of stock: a way for the corporation to raise capital

Subscriptions: Written offers to buy stock

• Pre-incorporation subscriptions are irrevocable for six months
• Post-incorporations are revocable until acceptance (when Board accepts the offer)

Consideration: In exchange for stock, the corporation can receive any tangible or intangible property or benefit to the corporation

• Amount: Board requires adequate amount of consideration
• ->Par: Minimum issuance price (Board can go lower)
• ->No par: No minimum issuance price–Board sets a price
• Re-acquired stock: Stock previous issued, but since reacquired by the corporation

Pre-emptive rights: Right of an existing shareholder to maintain her percentage of ownership by buying the stock whenever there is a new issuance of stock for money

• If Articles are silent on this, NO pre-emptive rights (unless in a statutory close corporation)
• Rights only attach to issuances of MONEY

Question 11

What are the statutory requirements for Directors?

Answer 11

Number: Must be 1 or more adult humans–number can be set in bylaws or in the Articles

Election: Initial directors can be named in the articles or elected by the incorporators–thereafter, shareholders elect directors at the annual meeting
-Entire board is elected each year unless the articles or a shareholder-adopted bylaw divide the board into half or thirds–“Staggered Board”

Shareholders can remove directors if a majority of shares entitled to vote actually vote to remove (can be removed with or without cause–for staggered board, only for cause)

• Vacancy: Board or Shareholders elect interim director
• Class: Class of stock elects replacement for director elected by that class of stock

Board of Directors takes an act in two ways:

• 1) Unanimous agreement in writing (e-mail OK)
• 2) By passing a resolution at a meeting (individual acton is void UNLESS ratified by a valid act) (conference calls also count)
• Notice: Methods usually set in the bylaws
• ->Required for regular meetings? NO
• ->Required for special meetings? YES. Need 2 days notice of the time and place–purpose isn’t necessary (if there is defect/no notice, defect can be waived)
• ->Directors cannot give proxies or enter voting agreements
• Quorum: Must have majority of all directors to do business (unless bylaws specify otherwise)
• ->If quorum exists, need ONLY majority of those present to pass a resolution
• ——–>But if someone leaves the quorum during the meeting, it is broken

Question 12

What is the role of the Board of Directors?

Answer 12

The board manages the business–sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental changes to shareholders, etc.

• Board can delegate to committees of directors–BUT committee cannot:
• Fill a board vacancy
• Amend or repeal bylaws
• Propose a fundamental corporate change

Question 13

What is the Duty of Care?

What is the Duty of Loyalty?

Answer 13

Duty of Care (Burden on the plaintiff): Director must act in what she believes in good faith to be in the best interests of the corporation, and with the care an ordinarily prudent person in similar circumstances would use. Should consider interests of the larger community, not just shareholders.

• Nonfeasance: Director does nothing–liable ONLY IF there’s a loss to the corporation
• Misfeasance: Director does something to hurt the corporation–not liable IF she meets the Business Judgment Rule (BJR) (did they deliberate/analyze?)

Duty of Loyalty (Burden on the Defendant): BJR never applies when there’s a conflict of interest. Duty of Loyalty comes up in a few ways–

• Interested Director Transaction:
• ->Corporation must enter the transaction
• ->Director must know of the deal/her interest
• ->Deal is between the corporation and the director, or a member of the director’s household, or another business of the director’s
• Interest director transaction will be set aside UNLESS directors shows:
• ->Deal was fair to the corporation when entered
• ->Her interest and the relevant facts were disclosed and deal was approved by
• —–>Majority of the disinterested directors voting (at least 2) OR majority of all disinterested shares
• Competing Ventures:
• ->Director cannot compete unfairly with her corporation
• ->Unfair to divulge corporate info to to steal that of customers/employees
• ->Making plans to compete is probably competing
• Corporate Opportunity: Director cannot usurp a corporate opportunity. Cannot take it until he–
• ->Tells the board
• ->Waits for the board to reject the opportunity
• Corporate opportunity: Something the corporation has a legitimate interest or expectancy in, and the corporation can afford

Question 14

Which directors are liable for board action?

Answer 14

A director is presumed to have concurred with board action UNLESS she objected to transacting business, OR her dissent or abstention is noted in writing (minutes, delivered to presiding officer, written dissent to the corporation immediately after meeting) (E-mail is OK)

Exceptions:

• Absent director not liable for things she missed
• Good faith reliance on info presented by an officer, employee, or committee (ex: when charged with improper distributions)

Question 15

What are officers and how are they selected?

Answer 15

Officers: are agents of the corporation, so they can bind the corporation by acts for which they have authority
-President has inherent authority to bind the corporation to contracts in the ordinary course of business, but no authority to fire other officers

Selection: Officers are selected by and removed by the board, which also sets officer compensation

Question 16

How are officers and directors indemnified?

Answer 16

Indemnification:

• BarreD: Corp barred from indemnifying when officer/director is held liable on the basis of an improper financial benefit
• Mandatory: If director is “wholly successful”, on the merits in winning the suit
• Permissive: If the case settle–disinterested directors will look at her good faith and reasonable belief that actions were in corp’s best interest
• Court can always order reimbursement if it is justified in view of all circumstances
• Articles can exculpate directors only for breach of the duty of care

Question 17

Shareholder management in a close corporation?

Answer 17

Close Corporation: Shareholders ordinarily can’t manage a corporation but can run the corp directly in a close corporation (few shareholders +stock is not publicly traded)

• GA: Where stock is not traded on a national exchange, shareholders can authorize elimination of the board and run the corp
• ->Authorization can come from articles or bylaws, OR unanimous written shareholder agreement
• SHs in close corporations owe fiduciary duties to each other

Licensed professionals may incorporate as a professional corporation–must included “associated” “professional association”, etc.

• Articles must state that purpose is to practice in the profession named and that the corp is governed by the GA Professional Corporation Act
• At least one director and the president must be a licensed professional, and the SHs must be licensed professionals
• No vicarious liability
• When a SH in a PC dies, PC purchases his stock within six months

Question 18

Shareholder derivative suits? What are the requirements?

Answer 18

Derivative suit: Shareholder is suing to enforce the corporation’s claim, not her own personal claim.

• If SH wins the suit, Corporation receives the money from the judgment
• SH gets costs and attorneys’ fees, usually from the corporation
• If SH loses the suit, can’t recover costs and attorneys’ fees
• SH is liable to the defendant for its costs and attorneys’ fees, IF she sued without reasonable cause
• Res judicata precludes same claim by other SHs

Requirements for bringing a derivative suit?

• Stock ownership when the claim rose and throughout litigation
• Adequate representation of corp’s interest
• Written demand of the board that corp bring suit
• ->Can’t sue until 9 days after demand unless directors reject it before waiting period is up
• Corporation must be initially joined as a defendant
• Suit can be dismissed or settled by parties ONLY WITH court approval

Corporation can move to dismiss the suit upon showing that independent investigation showed the suit was not in the corp’s best inerest

Question 19

Shareholder voting–who votes

Answer 19

Who votes: Generally, the record shareholder as of the record date has he right to vote
-Record shareholder is the person shown as the owner in the corp records. The record date is a voter eligibility cut-off

Exceptions
-Corp re-acquires stock before the record date–not voted because it’s not outstanding

-Death of a shareholder: Executor can vote the shares

• Proxies:
• ->Must be in writing (fax or e-mail OK)
• ->Signed by the record shareholder
• ->Directed to the secretary of corporation
• ->Authorizes another to vote the shares (Proxy is good for 11 months unless it says otherwise, and can revoke whenever you want, unless it’s coupled with an interest)
• Voting trust: Allows one to pool voting power
• ->Written trust agreement
• ->Transfer of legal title of shares to trustee
• ->Transfer or legal title recorded with corp
• ->Original SHs receive trust certificates and retain all other rights
• ->10 year max
• Voting Agreement (pooling)
• ->SHs can enter into agreement
• ->Needs to be in writing and signed
• ->Specifically enforceable
• ->20 year max; Renewable up to 20 years more

Question 20

Shareholder voting–where do SHs vote?

Answer 20

Usually take action at a meeting that satisfies quorum and voting rules. They can also act by unanimous written consent(fax or e-mail OK) of the holders of all voting shares

Meetings (Can be anywhere, and by telephone or internet)

• Annual: To elect directors
• Special meeting: Called by board, holders of 25% of voting shares, or anyone authorized in bylaws

Need notice (fax, e-mail, reasonable oral notice) to every SH, for every meeting (between 10-60 days before meeting)

• Contents: When, where, and why (need PURPOSE)
• If fundamental corp change or removal of a director is on agenda, notice MUST say so
• If corp fails to give notice to any SH, ANY act at the meeting is void, UNLESS lack of notice is waived

Waiver can be:

• Express–in writing and signed anytime
• Implied–attending the meeting without objection

Question 21

Shareholder voting–how do SHs vote?

Answer 21

There must be a quorum represented at the meeting. Determination of quorum is based on the number of SHARES represented, not the number of SHs

• Quorum generally requires a majority of outstanding shares
• Quorum NOT lost if people leave the meeting
• Just need a majority of shares VOTING to have a proper majority

Cumulative voting: Only available when SHs are electing directors

• Multiply number of shares x number of directors to be elected = number of votes
• Only exists if Articles allow for it

Question 22

Stock transfer restrictions?

Answer 22

Can always sell or give stock away, but can restrict transferability

• Test: Restriction can’t be an undue restrain on alienation
• A Right of First Refusal is valid as long as the Corp pays a reasonable price
• Restriction can’t be invoked against the transferee, unless:
• ->It’s noted on the stock certificate
• ->Transferee has actual knowledge of the restriction

Question 23

Right of Shareholder to Inspect (And Copy) the Books and Records?

Answer 23

Routine Material: Articles. Bylaws, registration statements, minutes of shareholder meetings

• Can demand access to inspect and copy during regular business hours
• Demand must be in writing at least 5 business days before inspection
• Don’t ned to state purpose

Sensitive material: accounting records, minutes of directors’ meetings

• Can make written demand at least 5 business days in advance
• Must describe the documents and state a proper purpose (related to interest as shareholder)

If corp fails to allow proper inspection, superior court has power to compel production of the records

Directors have unfettered access to corporate books and records

Question 24

Distributions by Corp to SHs?

Answer 24

Distributions: 3 different types
-Dividends
-Repurchase SH’s stock
Redemption (forced sale of stock to corp)

Distributions are made at the board’s discretion.

• Shareholders have a right to distribution only when board declares it
• Very tough to win an action to compel distribution (would need to make a strong showing of abuse of discretion)

Order of dividends

• Cumulative and Cumulative Preferred (Cumulative over a number of years)
• Preferred and Common Stock (Preferred always first)

For a distribution, can use funds:

• Even if money was lost that year, UNLESS insolvent or distribution would make corp insolvent
• ->Unable to pay its debts as they come due, OR
• Total assets are less than liabilities

Directors are jointly and severally liable for improper distribution IF declaring the dividends was negligent, reckless, or intentional
-SHs are personally liable IF they knew the distribution was improper when they received it (knowledge)

Question 25

What are characteristics of Fundamental Corporate Change?

Answer 25

Fundamental Corporate Change–Need four things:

• Board action adopting resolution of corp change
• Board must submit proposal to shareholders with written notice
• Must get shareholder approval, by a majority of the shares entitled to vote
• Need to deliver a document to Secretary of State

Question 26

What are examples of a fundamental corporate change?

Answer 26

Mergers, Amendment of the Articles, Disposition All Assets, Share Exchange, Dissolution

Question 27

Shareholder right of appraisal? When does a SH have this right?

How does a SH perfect their right of appraisal?

Answer 27

Right of appraisal: Right to force the corporation to buy your stock for fair value

Actions by corporation to trigger right:

• Amendment to the articles
• Merger
• Disposition of substantially all assets not in the ordinary course of business
• Transfer of shares in a share exchange

Right not available if stock is listed on a national exchange or has 2000 or more shareholders–Right of appraisal applies ONLY to Close Corporations

Perfecting Right of Appraisal

• Before SH vote, file with corp written notice of objection and intent to demand payment
• Abstain or vote against the proposed change
• After vote, within set time, make written demand to be bought out and deposit stock with the corporation

If SH and Corp cannot agree on fair value, the Corp can sue, and the Court may appoint an appraiser

Question 28

Amendment of Articles–what’s required?

Answer 28

Amendment of Articles:

• Requires Board action and notice to shareholders
• Shareholder approval (majority of shares entitled to vote)
• If approved, deliver certificate to the Secretary of State
• If amendment materially and adversely affects SH’s stock, can have dissenting rights of appraisal

Question 29

Mergers–what’s required?

Answer 29

Mergers:
-Board action (both corporations) and notice to shareholders
-Shareholder approval (generally both corporations)–Majority of shares entitled to vote
-No SH approval required in a Short-form merger: where a 90% or more owned subsidiary is merged into a parent
corporation
-If approved, deliver articles of merger to Secretary of State
-Dissenting SH right of appraisal: For shareholders of both companies in a merger/shareholders of subsidiary in short-form merger
-Effect: Surviving company succeeds to all rights and liabilities of the disappearing company
–>Successor liability is presumed in a merger

Question 30

Disposition of all or substantially all of the assets NOT in the ordinary course of business OR Share Exchange

Answer 30

Both changes are fundamental corporate changes for the Seller Corporation, not the Buyer

• Need Board action and notice to selling corporation’s SHs
• Approval by selling corp’s SHs
• ->Need majority of shares entitled to vote from selling corp
• ->None needed from buyer corp’s SHs
• Dissenting SH rights of appraisal for selling corp SHs
• Deliver articles to Secretary of State in a share exchange (NOT needed for a transfer of assets)
• No successor liability (unless buyer of assets is a mere continuation of selling corp)

Question 31

Dissolution–different types?

Answer 31

Dissolution: The ultimate fundamental corporate change

Voluntary: Need Board action AND approval by a majority of the shares entitled to vote

• File notice of intent to dissolve with Secretary of State
• Corp stays in existence to wind up–notify creditors

Involuntary (by court order):

• Present SH can petition because of:
• ->Director deadlock causing irreparable harm
• ->Waste of assets
• ->SHs have failed at two consecutive meetings to fil a vacant board position
• ->20% of outstanding shares petition because of illegal, oppressive, or fraudulent acts by directors
• Alternative: court might order buy-out of objecting SH in a close-corporation
• Creditor can petition because corporation is 1) insolvent, or 2) admits the debt in writing
• GA attorney general can seek dissolution for procuring incorporation through fraud or abusing authority

Administrative: SoS gives notice of failure to pay license tax for one year, to maintain registered office, to file annual registration, etc.–If not remedied within 60 days, SoS can sign certificate of dissolution, dissolving the corporation. Corp can apply for reinstatement

Winding up (liquidation): Involves 1) gathering all assets, 2) converting to cash, 3) paying creditors, and 4) distributing remainder to shareholders, pro-rata by share unless there is a liquidation preference

• Liquidation preference: Means “pay first”, like a dividend preference–Must be in the Articles
• If corp gives money to SHs instead of creditors, the creditors can sue the SHs to recover the money

Question 32

Different types of investment securities?

Answer 32

Securities as Investments:

• Debt Securities: Investor lends capital to the corporation, to be repaid as specified in the agreement–debt holder is a creditor, NOT owner
• ->Secured by corporate assets–bond
• ->Unsecured–debenture
• Equity Securities: Investor buys stock from the corporation, which generates capital for the business–equity holder IS an owner, NOT a creditor

Question 33

Rule 10b-5? What does it prohibit, and how is it applied?

Answer 33

Rule 10b-5: Aimed at deceit–prohibits fraud or misrepresentation (or nondisclosure) in connection with the purchase or sale of any security (debt or equity). Need–

• Deal must use an “instrumentality of interstate commerce” (mail, telephone, or trade on national exchange)
• Type of transactions
• ->Misrepresentation of material information
• ->Insider trading: ONLY a problem for someone whose job gives them a duty to abstain or disclose (relationship of trust and confidence with SHs)
• ->Tipping: Insider passes along material inside information for a wrongful purpose

-Materiality: Misrepresentation or omission MUST concern a material fact–one a reasonable investor would consider important in making an investment decision

• Possible plaintiffs
• ->SEC
• ->Private action for damages by defrauded buyer or seller
• Possible defendants: “Any person”
• ->Company that issues a misleading press release
• ->Buyer or seller of securities who misrepresents material information
• ->Buyer or seller who trades on material inside info (where there is a duty to disclose)
• ->Tipper (passing info along in breach of duty, and benefited) and Tippee (Traded on tip, and knew or should have known info was improperly passed)
• Scienter: Defendant must have an intent to deceive, manipulate or defraud–recklessness may suffice
• Reliance: Presumed in public misrepresentation and nondisclosure cases, but a separate element in fraud cases

Question 34

Section 16B and speculation–to whom and how does it apply?

Answer 34

Section 16B: Provides for recovery BY the Corp of “profits” gained by certain insiders from buying/selling company’s stock (aimed at speculation by directors, officers, and 10% of SHs). Applies–

• Reporting corporation: 1) Listed on a national exchange, or 2) at least 500 shareholders and $10,000,000 in assets
• Types of defendants: Director, Officer, Shareholder who owns over 105 (both when she bought and sold)
• Type of transaction: Buying or selling stock within a single six-month period (short-swing trading)–IF, within six months before or after any sale, there was a purchase at a lower price, there IS a PROFIT