Corporations Flashcards
De Jure Corporation
In order to form a valid corporation, one or more incorporators must file articles of incorporation with the Secretary of State. When the Secretary accepts the Articles, a de jure corporation is formed.
The articles of incorporation must also state the corporation’s purpose. At common law, where the corporate directors engaged in activities which were beyond the scope of the corporation’s purpose – so called, ultra vires activities – those activities were void. However, under the modern approach ultra vires contracts are valid. But, shareholders may seek an injunction, if the shareholders learn that the corporation is planning an ultra vires activity. Moreover, responsible individuals can be held liable for losses dues to ultra vires activities.
De Facto Corporation
Where a person makes a good faith effort to comply with the incorporation statute, but unbeknownst to the proposed incorporator, fails to achieve de jure status, the business will nonetheless be treated as a corporation if it asserts some sort of business privilege.
Corporation by Estoppel
A third party who deals with a business as a corporation, will be estopped from later denying the validity of the corporation.
Promoters
A promoter may enter into contracts on behalf of a corporation not yet formed. However, the corporation will not be liable on those contracts unless and until the corporation expressly or impliedly adopts the contract. Furthermore, the promoters will remain liable on those contracts unless and until there is a novation whereby the corporation is substituted for the promoter under the terms of the contract.
Revocation of Subscription
Pre-incorporation, a subscription is irrevocable for six months unless provided otherwise. Post-incporation, a subscription is freely revocable until acceptance.
Consideration
There is a split in authority regarding appropriate forms of consideration for stock. Under the traditional rule, only money, property, or services already performed could qualify as appropriate forms of consideration. However, under the modern trend, any tangible or intangible property or benefit is appropriate consideration, including promissory notes and future services.
Watered Stock
A corporation’s stock must not be sold for below par value – the minimum issuance price. Where a director authorizes a sale of the coporations stock for below par value – that is where the director authorizes watered stock – both the director and the purchaser are liable to the corporation for the lost value. But, where the purchasers transfers the stock to a third party, the third party is not liable if he acted in good faith.
Preemptive Rights
Under the traditional view, shareholders were automatically given preemptive rights to purchase shares of stock in order to maintain their percentage ownership whenever the corporation issued new common stock for cash. However, under the modern trend, preemptive rights will not be recognized unless the articles of incorporation specifically provide for them.
Directors and Officers (election and removal)
Directors are elected by the shareholders at the annual meeting. Directors can be removed by the shareholders with or without cause.
Directors and Officers (board action)
There are only two ways the Board of Directions can take valid action: (1) unanimous written consent to act without a meeting or (2) a meeting that satisfies the quorum and voting requirements. If neither of these requirements are met, the act is void unless later ratified by a valid corporate act.
The quorum requirement for director’s meetings is a majority of all directors (unless the bylaws provide otherwise). Where a quorum is present at the meeting, passing a resolution requires only a majority of votes present. However, quorum may be lost if enough directors leave the meeting.
Directors and Officers (duty of care)
A director owes a duty of care to the corporation to act in good faith as a prudent person would act in regards to her own business. A director is liable for nonfeasance only to the extent that she caused loss to the corporation. A director is liable for misfeasance only if she fails to meet the business judgment rule. Under the business judgment rule, a court will not second guess the decisions of the board of directors if it was made in good faith, on an informed and rational basis.
Directors and Officers (duty of loyalty)
A director owes a duty of loyalty to the corporation to act in good faith in the reasonable belief that she is acting in the best interest of the corporation.
A director must not compete with the corporation. Remedy: constructive trust on profits and possibly damages.
A director must not usurp corporate opportunities. A corporate opportunity is anything the corporation could reasonably be expected to be interested in.
Directors and Officers (liability)
Generally, all directors are presumed to have concurred in all board activities, unless the directors dissent or abstention is noted in writing. However, there is an exception for directors who were absent when the activity was approved. Also, there is an exception for directors who reasonably relied on the good faith assertions of another director, officer, or auditor whom they reasonably believe is competent.
Shareholders (Piercing the Corporate Veil)
Generally, a shareholder is not liable for the acts or debts of the corporation, but the court will pierce the corporate veil and hold the shareholder personally liable to avoid fraud or injustice. Courts are inclined to pierce the corporate veil where the shareholder is acting as the alter ego of the corporation, that is there is a serious identity of interests. Also, courts are more inclined to pierce when the shareholders started a corporation which was undercapitalized at formation. Also, where a parent corporation forms a subsidiary for the purpose of avoiding the parent’s debts, the court will pierce the corporate veil and hold the subsidiary personally liable for the debts of the parent.
Shareholders (derivative suit)
A shareholder may bring a derivative suit on behalf of the corporation where (1) the plaintiff was a shareholder at the time of the conduct giving rise to the suit, (2) the plaintiff can adequately represent the corporation, and (3) the plaintiff first made a written demand that the corporation bring suit on its own – unless a demand would be futile. Where the suit is successful, the recovery goes to the corporation. However, the shareholder should be reimbursed for costs and attorney fees
