Corporations Flashcards
1
Q
A corporation is
A
a legal entity, created under state law. It is separate and distinct from its owners (the shareholders). It has its own rights and obligations.
2
Q
A corporation has four basic characteristics:
A
a. perpetual or continuous existence
b. free transferability
c. limited liability for its owners
d. centralized management
3
Q
In general, a corporation’s profits are subject to double taxation:
A
a. First, the corporation is taxed as a separate, taxable entity.
b. Second, when corporate profits are distributed to shareholders, the distributions are treated as part of the taxable income of each shareholder.
4
Q
C Corporation
A
This is the default. Unless a business entity qualifies and elects to be an S Corporation, a corporation will be taxed pursuant to subchapter C of the Internal Revenue Code. Its profits will be subject to double taxation as described above.
5
Q
S Corporation
A
If a business qualifies, it may elect to be taxed under subchapter S of the Internal Revenue Code, and it will be treated as a “flow-through” entity. In other words, like partnerships, S corporations pay no tax on its profits.
Instead, only the shareholders will be taxed on its profits, in proportion to the number of shares they own. This is true whether or not the profits are distributed out to the shareholders.
6
Q
To qualify to elect status as a subchapter S corporation, the corporation must:
A
(a) be closely held (that is, not publicly held);
(b) have no shareholders who are not non-resident aliens; and
(c) have issued no more than one class of stock.
7
Q
A domestic corporation is
A
a corporation incorporated under the laws of Florida, while a foreign corporation is a corporation incorporated under the laws of another state or of another country.
8
Q
Foreign corporations
A
can transact business in Florida but must obtain a “certificate of authority” from the Department of State and must continuously maintain a registered office and agent in Florida.
A foreign corporation with a valid certificate of authority has the same rights and privileges as, and is subject to the same duties, restrictions, penalties, and liabilities now or later imposed on, a domestic corporation.
9
Q
The certificate application must state:
A
1) the name of the foreign corporation;
2) the state where it was incorporated and the date of its incorporation;
3) the address of its principal office;
4) the address of its registered office in Florida and the name of its registered agent at this office; and
5) the names and usual business addresses of its current directors and officers.
10
Q
Exception to certificate requirement
A
Short term or inconsequential business in Florida doesn’t trigger the registration requirement.
11
Q
“Internal affairs rule”
A
The internal affairs of a corporation are governed by the law of the state of incorporation.
12
Q
If a foreign corporation transacting business in Florida lacks a certificate of authority, it will NOT be:
A
Able to maintain a court proceeding in any Florida court until it obtains a certificate of authority.
Failure to obtain a COA does not impair the validity of any of its contracts, deeds, mortgages, security interests, or corporate acts or prevent it from defending a lawsuit here.
13
Q
“Not-for-Profit” Corporations [501(c)(3) Corporations]
A
a. “Not-for-profit” corporations may actually earn profits; however, the profits are not taxed or distributed as they would be in a for-profit corporation.
b. “Not-for-profit” corporations do not have shareholders; instead, they have members.
c. The profits of a “not-for-profit” are not distributed to its members, and if SEC regulations are observed, the profits are not taxed.
14
Q
Unless the articles of incorporation provide otherwise, what are 11 things a corporation can do:
A
a. sue and be sued;
b. purchase, own, lease, mortgage, and sell real or personal property or any interest therein;
c. lend money or use their credit;
d. purchase and sell any interest or obligations in any other entity;
e. enter into contracts and guarantees, incur liability, borrow money, and issue notes, bonds, and other obligations;
f. conduct business and locate offices within or outside of Florida;
g. make charitable donations;
h. start other entities;
i. provide life insurance for directors, officers, employees, or shareholders;
j. elect directors and appoint officers, employees, and agents of the corporation and define their duties, fix their compensation, and lend them money; and
k. make and amend bylaws for management of the business in a manner consistent with the articles of incorporation and Florida law.
15
Q
Ultra Vires Acts
A
An act that goes beyond the corporation’s authority or beyond the limits of its powers as set forth in its articles of incorporation and bylaws.
16
Q
Limitations to Ultra Vires Challenges
A
Florida statute limits challenges to the following proceedings:
(1) In a proceeding by a shareholder against the corporation to enjoin the act;
(2) In a proceeding by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, or through shareholders in a representative suit, against an incumbent or former officer, employee, or agent of the corporation; or
(3) in a proceeding by the government to dissolve the corporation or to enjoin the corporation from the transaction of unauthorized business.
17
Q
Who Are Promoters?
A
Promoters take the necessary preliminary steps for creating a corporation; these steps often involve contracts that the promoters enter into for the benefit of the not-yet-formed corporation.
18
Q
Are Promoters agents of the corporation?
A
Promoters are not agents of the contemplated corporation.
a. Because the corporation is not yet in existence, it cannot be a principal to any agency relationship with a promoter.
b. Consequently, promoters have no power to bind the not-yet-formed corporation.
19
Q
Legal Status of Pre-Incorporation Transactions
A
A corporation is not liable for pre-incorporation contracts made for its benefit by promoters unless the corporation expressly or impliedly adopt the contract after formation
a. Express adoption generally occurs when the board of directors passes a resolution to this effect.
b. Implied adoption occurs when the corporation: the corporation accepts or acknowledges the benefits of the contract in some manner
20
Q
A corporation is unable to ratify a pre-incorporation transaction because for ratification to occur…
A
there must be a principal that would have been lawfully able to authorize the transaction at the time it was entered into. However, the corporation does not yet exist when the pre-incorporation transaction occurs. This means that it cannot later ratify the transaction as if it had been a principal and the promoter or promoters were its agents.
21
Q
What about liability for promoters on pre-incorporation contracts?
A
Any person purporting to act on behalf of a corporation and having actual knowledge that the corporation is not yet effectively incorporated will generally be jointly and severally liable for all liabilities while so acting
22
Q
What about liability for promoters on pre-incorporation contracts?
Exceptions
A
(1) Promoters will NOT be liable to any person who has actual knowledge that the business has not been incorporated
(2) Promoters will not be liable if a novation occurs, so that the third party releases the promoters from all personal liability on the pre-incorporation contract.
23
Q
A novation occurs when
A
three parties—the promoter, the second party to the original contract, and the duly incorporated corporation—agree to substitution of the corporation as a party to the contract in place of the promoter.
24
Q
Incorporation Requirements
A
There must be properly executed articles of incorporation.
The articles of incorporation must be properly filed.
In general, corporate existence begins on the date the articles of incorporation are filed.
25
Articles of incorporation are to be prepared by
an incorporator or incorporators, who are responsible for executing and filing the articles.
26
To be properly executed, the articles must include:
(1) the corporation’s name;
(2) the corporation’s street and mailing address;
(3) the number of shares the corporation is authorized to issue, or authorized shares;
(4) the name and address of each incorporator;
(5) any preemptive rights granted to shareholders (Preemptive rights are rights to buy additional shares to maintain their percentage of ownership in the corporation); and
(6) the street address of the corporation’s initial registered office and the name of its initial registered agent.
27
With respect to the naming requirement, a corporation’s name must:
(1) be unique;
(2) must contain the word “corporation,” “company,” or “incorporated” or its abbreviation;
(3) it must NOT imply any connection with any state or federal government agency.
28
With respect to the requirement concerning authorized shares, the articles must:
(1) prescribe the classes of shares; the number of shares of each class that the corporation is authorized to issue; and it must prescribe the preferences, limitations, and relative rights of each class of shares, AND
(2) the articles must: designate one or more classes that together have unlimited voting rights and designate one or more classes that together are entitled to receive the corporations net assets upon dissolution
29
In the articles, a statement of the corporation’s purpose is
NOT required.
Nevertheless, the articles may include a statement of purpose, as well provisions regarding most any aspect of its internal governance and the management of its business.
30
If initial directors are NOT named in the articles of incorporation, the incorporators must
hold an organizational meeting to elect the directors. After that: either the incorporators or directors must complete the organization of the incorporation by appointing officers and adopting bylaws
31
Bylaws vs. Constitution
The articles of incorporation are like the corporation’s constitution and the bylaws are like the corporation’s statutes. Therefore, bylaws must be consistent with the articles. To the extent there is any inconsistency, the articles will trump the bylaws.
32
De Facto Corporations
A good faith attempt to comply with the statutory requisites for formation; AND
Some actual use of the purported corporate existence, such as carrying on business openly as a corporation.
If a de facto corporation is deemed to exist, this will protect shareholders from personal liability for corporate obligations. However, the state may still challenge its right to engage in business as a corporation.
33
Corporation by Estoppel
Persons acting on behalf of a business entity under the mistaken belief that the entity is properly incorporated have no personal liability. But the people have to reasonably believe that a corporation has been formed correctly.
However, a person acting on behalf of a business entity that is not properly incorporated will incur liability to third parties if: there is actual knowledge that there is no incorporation
34
Where a third party believed that he was dealing with a corporation, then for purposes of that transaction...
the third party is estopped from denying the existence of the purported corporate entity. So the owners of the purported corporation will not be personally liable, even though there has not been proper incorporation.
35
De Jure Corporation
Substantial but not complete complaiance with statutory requisites for formation
36
Difference between De Jure and De Facto
A key distinction between a de jure and de facto corporation involves the articles of incorporation. If articles were filed but filed improperly, the corporation is most likely a de jure corporation.
37
Debt Securities
Corporations issue debt securities to creditors who loan them money. In effect, each security acts as an IOU, representing the corporation’s promise to repay the loan principal plus interest at a specified time, although some debt securities allow the corporation to prepay the debt without a penalty.
Debt security holders typically do not have any voting rights in the corporation.
38
While many different types of debt securities exist, three are the most common:
a. Debentures, which are unsecured debt instruments that aren’t backed with any collateral.
b. Bonds, which are often secured with the company’s physical assets. This makes their holders secured creditors with priority interests.
c. Notes, which are debt securities that may be secured or unsecured and are generally not traded.
39
Upon liquidation of the corporation, debt security holders will have:
Priority of repayment over holders of equity securities. Secured debt holders have first priority.
40
Equity Securities
Corporations may raise capital by issuing shares of stock representing ownership interests in the corporation. That is, the corporation may sell equity in the company. The buyers of the shares are called “shareholders” or “stockholders.”
As owners, shareholders have financial rights to dividends when and as declared by the board of directors.
To protect their interests, shareholders have voting rights to elect directors and to approve major corporate transactions, such as mergers and increases in the number of authorized shares.
41
Upon liquidation of the corporation, shareholders are paid only:
After all the creditors have been paid
42
Common stock carries
Ownership rights, but no fixed obligations.
While common stock carries the highest risk, it also enjoys the greatest possibility of gain if the business is successful.
43
Preferred Stock
Preferred stock is characterized by a “preference” that gives holders of this class of stock rights to distributions of dividends or assets that are preferential to those assigned to common shares
Typically, preferred shares do not carry voting rights – the preference refers to money, not to a voice in the corporation’s operation
44
Straight preferred stock
The owners of such stock must receive a dividend of a specified dollar amount before any dividend can be offered to the holders of common stock.
45
Participating preferred stock
The preference includes that for straight preferred stock, plus an additional amount equal to the dividend paid to common stockholders.
46
Cumulative preferred stock
The preference includes not only that for straight preferred stock, but also an amount equal to any dividend potentially collectable in a prior year or years for which the corporation did not issue a dividend at all.
47
Convertible preferred stock
At the option of the holder, these are convertible to common stock or bonds of the corporation.
48
Redeemable preferred stock.
These may be cashed in at a predetermined amount and time at the option, as set forth in the articles, of the corporation or preferred stockholder.
49
Share Prices and Consideration
| Par value is
an amount that can be included in the articles that is the minimum (floor) price for which shares can be sold.
In Florida, there is no requirement that shares have a par value. The corporation can choose to have a par value, but it doesn’t have to.
If no-par shares are issued, the board may issue the shares for whatever consideration the board of directors deems adequate provided that the determination is made in good faith
50
In Florida, consideration for shares may take many forms, including:
(1) Money paid
(2) Labor already done
(3) Promissory notes
51
Additionally, Florida permits shares to be issued to directors, officers, or employees in consideration for:
services to be rendered in the future if there is a binding contract for the parties to actually perform the agreed-to services
Under these circumstances, however, the shares are not considered fully paid until the services have actually been rendered.
52
Watered Stock
This is stock that has been designated as fully paid even though it was issued for less than par value or, in the case of no-par stock, less than the agreed-upon fair market value.
53
Repurchase of Stock
Shares repurchased by the corporation may either be: Cancelled (cannot be re-issued), or held as treasury stock (can be resold)
Until treasury stock is resold, treasury stock is not entitled to voting rights or dividends.
54
In general, management of a corporation’s assets and business is vested:
In its board of directors
Typically, the board will delegate responsibility for the day-to-day operations of the corporation to corporate officers.
55
Typically, with respect to fundamental changes such as the sale of all or substantially all of the corporate assets, mergers, dissolution, and amendments of the articles of incorporation or bylaws:
The board proposes and recommends a course of action that is subject to shareholder approval
56
In Florida, a closely held corporation, also called a close corporation, is
A corporation with 100 or fewer shareholders at the time of the shareholder agreement, substantial participation of shareholders in management, and no easy market for the corporation’s shares.
57
The original board of directors is usually chosen by
the incorporators at the initial organizational meeting.
58
The number of directors is prescribed by
the articles of incorporation or bylaws. After that, directors are elected by the shareholders at their annual meeting.
Unless the articles of incorporation provide otherwise, directors are elected: By a plurality of the votes cast
59
In Florida, directors must be
natural persons who are over the age of 18.
60
Tenure of Directors:
Directors usually hold their positions for...
for one year and are elected at annual meetings of the shareholders.
A corporation’s articles of incorporation or bylaws may provide for: Staggered terms for directors – only part of the board is up for election every year
Suppose that a director dies, resigns, or is removed. The articles of incorporation or bylaws often permit the board to appoint an interim director to serve until the next shareholders’ meeting is held.
61
Unless the articles require removal for cause only, the shareholders may remove one or more directors
with or without cause.
62
If removal of a director is to be considered and voted upon at a meeting of the shareholders...
Notice of the meeting must state that the purpose of the meeting is removal of the director
63
Grounds for a director’s removal for cause include:
dishonesty, gross incompetence, or breach of duty of loyalty to the corporation
If a director’s removal for cause is sought, the director is entitled to notice of the reasons for removal as well as time to answer the charges.
64
In a cumulative voting system...
A minority of voters may be able to elect a director. So the rules make it so that a minority of voters can veto the removal of the director. So, in a cumulative voting system, even if most votes are in favor of removal, this may not be sufficient to preclude the minority of shareholders who elected the director from vetoing the removal.
65
Removal under Straight Voting
If cumulative voting is NOT authorized by the articles of incorporation, a director is removed ONLY IF the number of votes cast in favor in removal exceed the number of votes cast against removal
66
Removal under Cumulative Voting
If cumulative voting is authorized by the articles of incorporation, a director may NOT be removed if: the number of votes sufficient to elect the director under cumulative voting is voted against the directors removal
67
“Quorum” refers to
the minimal portion of the members of the board that must be present at a meeting of the board in order for valid board action to occur.
68
Unless otherwise provided in the articles of incorporation, a quorum consists of:
majority of the directors
69
A change in the quorum rule that is provided in the articles is effective so long as:
the required portion of the required directors is not less than one third
70
If the director is not present at the meeting, can he/she vote?
A director cannot delegate voting authority to a representative. If the director is not present at the meeting, he or she can’t vote.
71
Notice Requirement for Meetings
| For regular meetings of the board, unless the articles of incorporation or bylaws provide otherwise, the meeting may:
be held without notice of the date, time, place, or purpose of the meeting
72
Notice Requirement for Meetings
For special meetings of the board, unless the articles of incorporation or bylaws provide for a longer or shorter period, the meeting must:
be preceded by at least 2 days notice of the date, time, and place of the meeting – still doesn’t have to specify the purpose unless required by the articles of incorporation
The notice need not describe the purpose of the special meeting unless required by the articles of incorporation or bylaws.
73
A director is deemed “present” at a meeting of the board if
the director participates in the meeting through a means of communication that permits all directors participating to simultaneously hear each other. That is, directors can participate through a conference call.
74
Board Action
If a quorum is present at a duly held meeting of the board, an act of the board requires the affirmative vote of:
majority of the directors unless the articles or bylaws require a greater proportion
75
Board Action
Absent a board meeting, valid board action can still occur but only if the action is evidenced by:
one or more written consents that describe the action taken and that are signed by each director
So if there’s not a board meeting, the directors can take action only by unanimous agreement.
76
Voting Agreements
Ordinarily, proxies or agreements among directors to vote in a particular way with respect to prospective determinations are...
Void.
77
Voting Agreements
| Exception?
However, in closed corporations where the directors constitute all of the shareholders, voting agreements are permitted.
78
Delegation of Authority
Can the board delegate critical management decisions?
No. Critical management decisions must be made by the board and cannot be delegated.
However, the board of directors may appoint committees to act for it within ordinary and specified areas.
Even so, the recommendations or decisions of these subcommittees may be overridden by the full board before they have been put into action.
79
Delegation of Authority
Can the board delegate day to day management decisions?
Yes. The day-to-day operations of the corporate business may be delegated to corporate officers and agents.
80
Corporate Officers
| Appointment and Removal?
The corporation’s president, vice presidents, secretary, and treasurer are all corporate officers appointed by the board of directors.
Additional, or minor, officers are ordinarily appointed by the corporation’s president.
Ordinarily, corporate officers may be dismissed, without cause, by the board of directors.
81
Job Descriptions
| The president is charged with...
managing the corporation’s day-to-day affairs
82
Job Descriptions
| The vice president...
ordinarily performs the functions of the president when the latter is unavailable.
83
Job Descriptions
| The secretary is charged with...
taking minutes at director and shareholder meetings, as well as maintaining the corporation’s books and records.
84
Job Descriptions
| The treasurer is charged with...
receiving, depositing, and retaining receipts for corporate income and expenditures.
85
In general, decisions of the board to make charitable donations are upheld as long as:
plausible argument for long-term benefit to the corporation can be made
86
Ordinarily, decisions of the board that would bind the corporation to contracts extending beyond the terms of its current members are upheld unless:
contract extends for an unreasonably long period of time
87
In general, decisions about the distribution of dividends is within the discretion of the board; however, the board is not authorized to make distributions if, after doing so:
(1) the corporation could no longer pay off its debts as they become due in the ordinary course of business
(2) assets will be less than its liabilities
88
Corporate officers have the implied authority to enter into transactions that are:
reasonably related to perform the duties to which they are expressly responsible
89
In general, the implied authority of an officer does not extend to:
signing contracts that are for an overly long term without board approval
The board can ratify actions that, when performed, were outside an officer’s actual authority. Doing so renders the action retroactively authorized and binding on the corporation.
90
Duty of Care
Directors and officers of the corporation must act:
a. in good faith
b. with the same degree of care and skill as an: as an ordinarily prudent and
diligent person would act under similar circumstances; and
c. in a manner reasonably believed to be: to be in the best interests of the corporation.
91
To satisfy the requisite “degree of care and skill” required by the duty of care, management must:
act with reasonable care and skill and make a reasonable effort to apprise themselves with the facts necessary to make a proper decision
Reports furnished by corporate officers or agents may ordinarily be relied upon by directors in making their decisions.
92
The Business Judgment Rule
The business judgment rule is a rebuttable presumption that directors and officers have acted in a non-negligent way, as long as they were adequately informed.
EXAM TIP: This is an important rule. It effectively makes it difficult to win a lawsuit against a director for violating the duty of care.
93
Sarbanes-Oxley requires principal executives and financial officers to certify:
a. that they have reviewed the corporation’s financial reports;
b. that the reports do not contain any untrue statements or material omissions;
c. that the financial statements accurately portray the corporation’s financial condition; and
d. that they are responsible for implementing and evaluating the company’s internal controls and have evaluated these controls within the last 90 days.
94
Three Main Duties of Loyalty:
- No Usurpation of a Corporate Opportunity;
- Don’t Self-Deal (Don’t engage in “conflict of interest transactions”)
- Don’t Engage in Direct Competition
95
In determining whether an “opportunity” belongs to the corporation, Florida courts have considered:
(1) whether the business opportunity is closely related to the company’s line of business and
(2) whether the board expressed an interest in or expectancy of acquiring such a business opportunity.
96
Even if the “opportunity” is determined to belong to the corporation, no usurpation will be found if:
corporation was -after full disclosure- given the opportunity first to pursue it and declined or was otherwise unable to take advantage of the opportunity
97
An officer or director can transact business with the corporation if two conditions are met.
(1) First, there must be: notify the other directors of all material facts regarding the conflict
(2) Second, a majority of the non interested directors or non interested shareholders must vote to approve the transaction
98
Remedies if officer or director breaches one of the duties...
1. If feasible, the corporation may rescind the transactions that have been determined to be not entirely fair
2. Suppose that an officer or director improperly takes a corporate opportunity. Then a court may impose a constructive trust to pass profits back to the company that should have received them.
3. Directors (and officers) can also be liable for damages caused by their breach of duties or violations of law.
99
Defenses to Breach
1. Dissent or Non-Participation
2. Disclosure and Ratification
3. Finally, there will be no liability if it can be shown that the transaction was “fair and reasonable.”
100
Shareholders in their collective capacity have the power to:
elect/remove directors (with or without cause), amend bylaws and approved fundamental changes in the corporation
101
“Fundamental changes” refers to such things as
amendments to the articles, merger, dissolution, and the sale of substantially all corporate assets.
102
Annual meetings are
prescribed in the bylaws. At annual meetings, directors are elected and any other proper business can be transacted.
103
Special meetings are called for a specific purpose; they may be called by:
(a) the board of directors,
(b) other persons authorized to do so in the articles or bylaws, or
(c) by the holders of not less than 10 percent of the votes entitled to be cast on the issue to be considered at the meeting.
104
Notice requirements
Each shareholder of record must be provided with:
timely written notice of each annual or special shareholder meeting no fewer than 10 and no more than 60 days before the meeting date
105
Notice requirements
For an annual meeting, proper notice will state...
the date, time, and place of the shareholder meeting.
NOTE: The purpose or purposes of an annual meeting need not be included in the notice unless the articles of incorporation require otherwise.
106
Notice requirements
For special meetings, proper notice will state...
the place, date, hour, and purpose of the shareholder meeting.
107
Notice requirements
| Waiver...
For any meeting, a shareholder may waive the notice requirement and can do so before or after the date of the meeting so long as it is communicated in a signed writing delivered to the corporation for inclusion in the minutes or filing in the corporate records
108
Valid shareholder action at a meeting requires...
The presence of a quorum at the meeting is a prerequisite for valid shareholder action.
109
What constitutes a quorum?
It is a majority of the votes of each class of stock entitled to be cast on a matter, unless the articles provide for a different proportion as long as it is at least one third of the share entitled to vote
If a quorum is present at the meeting, shareholder action requires the affirmative vote of a majority of the votes cast, unless the articles requires a greater proportion
In Florida, once a quorum is present, it does not cease to exist because persons holding the necessary shares or proxies leave the meeting.
110
Shareholder action without a meeting
| As provided by the Florida statute, shareholder action can be effectively undertaken without a meeting if the action is:
(1) taken by at least the number of votes minimally required to authorize an action at a meeting where all voting groups and shares entitled to vote were present and voted; and
(2) evidenced by written consent describing the action dated and signed by the approving shareholders and delivered to the corporation
111
Usually, only common stock is entitled to vote. However, preferred shareholders are entitled to vote on a...
proposal that would create a class of stock that would have rights that are superior to the rights of the preferred shares.
112
Unless the articles of incorporation authorize so-called cumulative voting, elections for directors are conducted according to
so-called straight voting procedures.
113
In both straight voting and cumulative voting, the total number of votes a shareholder may cast in an election is...
the number of shares owned multiplied by the number of directors to be elected.
114
In a straight voting system, the total votes that a shareholder is entitled to cast must be...
divided up, with no one candidate able to receive more votes from a shareholder, in an election for a given board seat, than the number of shares owned by that shareholder.
115
In a cumulative voting system, the total votes that a shareholder is entitled to cast may be...
bundled or packaged in any manner desired by the shareholder.
116
Cumulative Voting vs. Straight Voting
Cumulative voting offers minority shareholders a greater likelihood of representation on the board of directors than would be possible under straight voting. In straight voting, majority shareholders can determine the election of all directors. In cumulative voting, minority shareholders can determine the election of at least some (but never most) of the directors.
117
A shareholder may vote in person or by proxy. A proxy is
a person who votes on behalf of the shareholder.
In Florida, a proxy may be appointed by signing an appointment form or by electronic transmission, and it becomes effective when received by the secretary or other officer authorized to tabulate votes.
118
An appointment of a proxy is valid for...
up to 11 months unless: a longer period is expressly provided in the appointment
119
A proxy is not revoked by the death or incapacity of the shareholder who had granted it unless:
notice of the death or incapacity is received by the secretary before the proxy is exercised
120
A proxy is irrevocable only if the proxy instrument:
conspicuously states that it is irrevocable and the appointment is coupled with an interest
121
“Coupled with an interest” means that
the proxy benefits not just the shareholder, but also benefits the proxy-holder. An example would be where a shareholder pledges his shares as collateral to a bank, and the bank insists on a proxy to vote the shares.
122
If the proxy is revocable, the shareholder can revoke it by:
(1) delivery to the corporate secretary of a writing revoking the proxy;
(2) subsequently giving a proxy to another person; or
(3) personally voting at the shareholders’ meeting.
123
Under a pooling agreement,
two or more shareholders enter into a binding contract whereby they agree to vote their shares as all (or a majority) of them decide.
124
Under a voting trust,
shareholders assign their legal interest in the shares to a trustee, for which the shareholders receive a trust certificate as evidence of the interest assigned.
125
Shareholder Preemptive Rights
As provided by Florida statute, the shareholders of a corporation do NOT have preemptive rights to acquire newly issued (or re-issued) shares unless the articles of incorporation so provide.
126
If preemptive rights are provided by the articles, shareholders are entitled to a fair and reasonable opportunity to acquire:
proportional amounts of the corporations unissued shares and treasury shares on the decision of the board to issue them
127
A shareholder may waive his or her preemptive right; if
waiver is evidenced by a writing, it is irrevocable.
128
Preemptive rights do not apply to shares that are:
a. authorized in the articles of incorporation and then issued within 6 months of incorporation;
b. issued pursuant to a plan of reorganization;
c. issued to the corporations directors, officers, agents or employees; or
d. issued for consideration other than money
129
Even where preemptive rights are not recognized or are not applicable, many courts will disallow the issuance of new shares, or permit “quasi” preemptive rights, where directors or majority shareholders are seeking to:
a. dilute the interest of earlier shareholders or
| b. take unfair advantage of minority shareholders
130
Right to Transfer Shares
A shareholder may generally freely transfer his stock. But the corporation may impose reasonable restrictions upon alienability; these restrictions may be found in the articles of incorporation, bylaws, or in shareholder agreements.
If the restriction is contained in a shareholder agreement, to be enforceable there must be: a conspicuous reference to the restriction printed or otherwise included on the shares themselves
131
Reasonable restrictions on transfer include:
a. giving the corporation a right of first refusal;
b. compelling the sale of shares for a predetermined amount (even if lower than the market or book value) upon the shareholder’s death or termination of employment with the corporation;
c. prohibiting sales to particular types of persons such as competitors; and
d. sales to foreigners under an S-Corporation.
132
If a shareholder wrongfully transfers stock to a bona fide purchaser, the corporation can obtain:
damages from the selling shareholder but not from the purchaser
133
Right to Inspection of Corporate Books and Records
Shareholders are entitled to inspect and copy the corporation’s books and records during normal business hours, provided that shareholders demand is made in good faith and for a proper purpose
134
Proper purposes for shareholder inspection of corporate books and records include:
a. obtaining stockholder names and addresses to solicit proxies, where the shareholder believes in good faith that the policies of the present board are ineffective; and
b. investigating possible mismanagement where evidence justifies concern.
135
Shareholder’s Right to Sue
There are two ways that a shareholder can sue a corporation. They are a direct suit and a derivative suit.
136
In a direct action,
the shareholders may sue either as individuals or as part of a class action. The recovery in a direct action goes to the suing shareholders.
137
In a derivative action,
the shareholder sues on behalf of the corporation to enforce a corporate right.
138
Requirements and prerequisites to filing a derivative action
(1) Shareholder must have been a shareholder when the transaction complained of occurred
(2) Shareholder must demand that the board of directors commence an action to redress the alleged wrongs.
(3) In general, the complaint filed in a derivative suit must allege with particularity the demand made of the board and allege that: the board refused or ignored the demand for a period of at least 90 days
139
Dismissal or Settlement
The court may dismiss a derivative proceeding upon motion by the corporation if the court finds that there was:
A determination made in good faith and after conducting a reasonable investigation that the maintenance of the derivative suit is not in the best interest of the corporation
Once commenced, a derivative action cannot be discontinued or settled unless: court approval is obtained
140
Recovery in a Derivative Suit
If successful, the plaintiff is entitled to reimbursement from the corporation for his reasonable attorneys’ fees and litigation expenses.
The recovery is remitted directly to the corporation.
Exception: Recovery would benefit shareholders who should not be permitted to share in the recovery—for example, if the defendants in the action are also shareholders.
141
Indemnification of Directors and Officers in a Derivative Action
Florida corporations may indemnify successful directors and officers for attorneys’ fees and litigation expenses incurred in defending against a derivative action.
142
Appraisal Rights
In the event of a fundamental change to the corporation, a shareholder may be entitled to appraisal rights and to have her shares purchased by the corporation for fair value
143
Fundamental changes that can trigger appraisal rights involve...
Changes that are subject to shareholder approval, such as conversions, mergers, share exchanges, and disposition of substantially all assets.
Shareholders of a publicly traded company generally do not have appraisal rights.
The articles of incorporation may limit or eliminate the appraisal rights of holders of preferred stock
144
Duties of Shareholders
Majority or controlling shareholders of a corporation have a fiduciary duty to refrain from exercising their position in a manner that: takes undue advantage or oppresses the minority shareholders
145
Examples of improper conduct include:
Causing the board of directors to:
(1) guarantee loans made to, or to enter into loans with, a majority shareholder;
(2) issue additional stock for the purpose of diluting the minority’s interest;
(3) enter into contracts with the majority shareholder (or an entity affiliated with him) on unusually favorable terms;
(4) dissolve the corporation, or sell its assets, for the purpose of excluding the minority shareholders from participation in a profitable business (a “freeze out”); or
(5) selling a majority or controlling portion of a corporation’s stock when the seller knows or has reason to believe that the transfer will result in prejudice to the minority shareholders.
146
Conduct not violative of a fiduciary duty includes:
(1) selling a majority or controlling portion of a corporation’s stock for a premium;
(2) arranging for the resignation of directors or the appointment of directors upon acquisition of a controlling interest in the corporation.
147
Close Corporation - Shareholder Duties
All shareholders owe each other: an even stricter duty than that which is owed by controlling shareholders in a public corporation
148
Potential Liability of Shareholders
The corporate form provides shareholders with protection from personal liability for the corporation’s debts and obligations.
149
The Exception: Piercing the Corporate Veil
On rare occasions, courts will disregard the corporate entity (“pierce the corporate veil”) and hold the individual shareholders personally liable for corporate obligations if it is necessary to prevent fraud or injustice
150
To convince a court to “pierce the corporate veil,” a third party must convince the court that:
(1) Corporation’s independent existence was in fact a façade, and the shareholder was in fact the alter ego of the corporation;
(2) corporate form has been used fraudulently or for an improper purpose
(3) fraudulent or improper use of the corporate form caused injury to the plaintiff
151
Factors that courts consider
(1) Capitalization - Inadequate Assets
(2) One individual controls policy and/or business decisions?
(3) Commingled corporate and personal assets, siphoned off corporate funds, or used corporate assets as if they were their own personal property?
(4) Observance of corporate formalities
152
Subsidiary - Parent PCV
Parent corporation dominating its subsidiary corporation that the subsidiary is a mere shell or façade and that the two entities essentially act as one.
Businesses, records, and finances of the parent and subsidiary are insufficiently segregated.
153
Rule 10b-5 and Insider Trading
A claim for insider trading under Rule 10b-5 must allege reliance upon a misrepresentation or omission of a material fact where the material fact is misrepresented or omitted with knowledge or reckless disregard.
154
A 10b-5 action can be brought by
the SEC or by a private party, if that private party purchased, sold, issued or received the securities in question.
155
Insider Trading
Prevent fiduciaries with non-public knowledge from exploiting their corporate position for personal gain, and to enable shareholders who lose value due to market manipulations to recover their losses.
156
An “insider” is anyone who:
a. learns of material, non-public information as a consequence of his corporate position; OR
b. had a fiduciary relationship to the corporation or the plaintiff.
157
Those who transmit non-public information (“tippers”) may be liable if
their purpose in transmitting the information is to realize directly or indirectly some type of personal benefit or gain
158
Those who receive non-public information (“tippees”) may be liable if they:
should’ve been aware that the information was transferred from the tipper for personal gain
159
Rule 16(b)
Under Rule 16(b), a director, officer, or ten-percent shareholder of a corporation is strictly liable to that entity for profits derived from any “short-swing” transaction—that is, a sale and purchase of corporate securities within any six-month period.
160
Registration and Review of Securities Offerings
Both federal and state laws require that the issuer of any security register the offering of that security with the appropriate government agency, unless an exemption to the registration requirements is available.
161
The essential element of the registration statement is
the prospectus, which is disclosure document that presents facts about the issuer and the offered securities and must be delivered to all offerees
162
Exempt transactions include, among others,
intrastate offerings, and offerings made only to wealthy and knowledgeable investors, also known as accredited investors.
163
Under Florida Law (“Blue Sky Laws”)
Regardless of what the issuer discloses, if the Florida securities administrator thinks that the offering is unfair to potential investors, the state can prevent the offer (even if approved under federal law).
164
Article 8 Warranties
Direct vs. Indirect Holders
Direct holders are holders who have purchased their shares directly from the issuer (generally, the corporation).
Indirect holders are holders who have purchased their shares from a broker or other intermediary.
165
Article 8 Warranties
Warranties to direct holders include:
(1) the certificate is genuine and has not been materially altered;
(2) there is no known fact that might impair the validity of the security;
(3) there is no adverse claim to the security;
(4) the transfer does not violate any restriction on transfer; and
(5) the indorsement, if any, is made by an appropriate person or by an agent who has actual authority to act on behalf of the appropriate person.
166
The primary warranty for indirect holders is
that there is no adverse claim to the security entitlement.
167
Under the U.C.C., a contract for the sale or purchase of a security is
enforceable whether or not it is in writing and signed, even if it is for a term of more than one year. That is, the Statute of Frauds is inapplicable.
168
Under the U.C.C., all restrictions on transfers must be
noted conspicuously on the security certificate; if the certificate fails to note the restriction, the restriction will be: ineffective unless the registered owner was notified of the restriction
169
A tender offer is
an offer of cash or securities directly to the shareholders of a corporation in exchange for their shares at a premium over the market price.
Tender offers—even hostile tender offers—are NOT subject to approval by the board or majority of shareholder – not a corporate transaction, but the transaction of individual shareholders
170
While a board of directors cannot refuse or reject a tender offer, a board facing a hostile tender offer, or concerned about the possibility of one, may
implement a number of defensive mechanisms designed to thwart the tender offer. Examples are “poison pills,” leveraged buyouts, recapitalizations.
171
Federal Regulation of Tender Offers
| The Williams Act requires:
(1) the bidder to disclose, at the commencement of the offer, its tender offer, financial information, and plans for the company;
(2) a party acquiring more than 5% ownership of a corporation to disclose its identity, the number of shares held; the source and amount of funds for making the purchase; any arrangements made with others in the acquisition of these shares, its purposes in acquiring these shares; and its plans for the company; and
(3) the buyer to make the same price offer to everyone and take the shares pro rata if there are too many sellers.
172
Amending the Articles of Incorporation
A corporation’s board of directors may propose one or more amendments to the corporation’s articles of incorporation
The adoption of a proposed amendment requires approval by a majority of the shareholders unless otherwise provided by the articles
Board can make minor changes unless prohibited by articles
173
Amending the Articles of Incorporation
| Close Corp -
Unless otherwise provided by the articles of incorporation, the shareholders of a a close corporation may amend the articles of incorporation without an act of the directors at a meeting for which notice of the changes to be made has been given.
174
Selling or Transferring the Corporation’s Assets -
| Transfers in the Ordinary Course of Business
Leasing, exchanging, or otherwise disposing of all or substantially all of a corporation’s property in the regular course of business is not considered a fundamental corporate change that requires shareholder approval.
However, doing so is normally not considered to be in the ordinary course of business.
175
Selling or Transferring the Corporation’s Assets -
| Transfers Not in the Ordinary Course of Business
Where a corporation sells all or substantially all of its assets NOT in the ordinary course of business, the transaction must be approved by the board of directors and the shareholders
176
Rights of the Corporation’s Creditors
By disposing its assets, the corporation does NOT escape liability to its creditors for any outstanding obligations.
177
However, a purchaser of corporate assets is ordinarily NOT liable to the corporation’s creditors. The only exceptions are when:
(1) there is a de facto merger;
(2) the transfer is a fraudulent conveyance, made at less than fair market value or with the intent of defrauding the corporation’s creditors; or
(3) the purchaser assumed the corporation’s liabilities.
178
A merger occurs when
one corporation is absorbed into another (“surviving”) corporation; the shareholders of the absorbed corporation exchange their shares either for cash or for stock in the surviving corporation.
179
A consolidation occurs when
two or more corporations combine into a new corporation; the consolidated corporations cease to exist, a new legal entity is created, and all shareholders of the consolidated corporations exchange their stock for shares in the new corporation.
180
Dissolution
Decision by a corporation to cease carrying on its regular business operations.
A dissolved corporation continues its corporate existence, but only for purposes of winding up and liquidating its business affairs.
181
Winding Up and Liquidation
This refers to the process initiated by dissolution.
In winding up and liquidating its business affairs, the corporation pays off its debts and distributes any remaining assets to the shareholders.
182
Termination
This refers to a corporation that has completed the process of winding up and liquidating its business affairs.
Upon termination, the corporation ceases to exist.
183
If a corporation has not yet issued shares or commenced its business, a majority of its incorporators or a majority of its directors can dissolve the corporation by:
filing articles of dissolution with department of state
184
Dissolution by the Directors and Shareholders
Directors may propose dissolution and submit their proposal to shareholders for their approval.
Unless the articles of incorporation or the board of directors provide otherwise, the proposal is adopted upon a majority of all the votes entitled to be cast
185
The shareholder vote must take place at a duly noticed shareholder meeting; in addition to the ordinary notice requirements, the notice must:
(1) be given each shareholder of record whether or not entitled to vote and
(2) include an indication of its purpose or purposes.
186
Dissolution by the Shareholders
A shareholder action to dissolve the corporation is effective, even without action of the board and even absent a meeting of the shareholders, if it is taken by written consent of the shareholders.
187
The written consent must:
(1) describe the action taken;
(2) be dated;
(3) be signed by approving shareholders having the requisite number of votes of each voting group entitled to vote thereon; AND
(4) delivered to the corporation.
188
The requisite minimal number of approving shareholders for any action taken by written consent is:
The minimum number of votes with respect to each voting group that would be necessary to authorize an action taken at a meeting, if all groups and shares entitled to vote on the action were present at the meeting and voted on the matter.
189
Administrative Dissolution
| The Department of State may administratively dissolve a corporation upon the following grounds:
(1) the corporation failed to timely file its annual report and timely pay the filing fee;
(2) the corporation has been without a registered agent or registered office for at least 30 days;
(3) the corporation has failed to truthfully and fully respond to interrogatories propounded by the Department of State; OR
(4) the corporation’s period of duration, as stated in its articles, has expired.
190
Sixty days after serving notice on a corporation of the grounds for administrative dissolution...
The Department of State can issue a certificate of dissolution if the corporation has not demonstrated a to the reasonable satisfaction to the department that the grounds never existed or have been corrected
191
Judicial Dissolution
A Florida circuit court may dissolve a corporation in a proceeding that is brought by:
(1) the Department of Legal Affairs,
(2) a shareholder or shareholders, OR
(3) a creditor.
192
In a proceeding by the Department of Legal Affairs, the court may dissolve a corporation if it is established that:
the corporation obtained its articles of incorporation through fraud or has continued to abuse or exceed the authority inferred on it
193
In a proceeding by a shareholder, there can be dissolution by the court if it is established that:
(1) a deadlock among the directors exists that threatens or has caused irreparable injury to the corporation; OR
(2) a deadlock among the shareholders exists and are unable to elect successors to the board of directors.
194
In a proceeding by a shareholder or group of shareholders in a corporation having fewer than 35 shareholders (a close corporation), there can be dissolution by a court if it is established that:
(1) corporation is suffering material injury because its assets are being misapplied or wasted
(2) those in control of the corporation have acted, are acting, or are reasonably expected to act in a manner that is illegal or fraudulent.
195
In a proceeding by a creditor of the corporation, there can be dissolution by a court if it is established that:
(1) corporation is insolvent and
(2) either the corporation has admitted in writing that the creditor’s claim is due or the creditor’s claim has been reduced to judgment and remains unsatisfied.
196
Winding Up and Liquidation
After dissolution, a corporation remains liable for its debts and must wind up all corporate business within a reasonable time.
197
To liquidate, the corporation must:
a. collect its assets;
b. dispose of its properties that will not be distributed in kind to its shareholders; and
c. pay its liabilities to creditors, or make provisions for discharging its liabilities.
198
Once its debts have been paid off, the corporation must:
distribute its remaining assets among shareholders according to their interest
199
Upon the distribution of its remaining assets to shareholders, the winding up process is completed, the corporation is terminated, and its corporate existence...
comes to an end.
