Corporations

Question 0

What are the requirements of incorporating?

Answer 0

People – incorporators [must have more than one].

• -They sign and file the articles of incorporation.
• -Can be either a person or entity.

Paper-articles of incorporation

Act-file articles with Secretary of State and pay the required fee.

• -Acceptance by the Secretary of State is conclusive proof of valid formation [a de jure Corporation].
• -A corporation can file it’s articles in any state chooses.
• —-But whatever state if I was in, becomes the default rules that govern the internal affairs of the corporation.

Question 1

Who is a promoter?

Answer 1

A promoter is a person acting on behalf of a corporation not yet formed.

• -Agency analysis may be required to determine what type of authority promoter had.
• —The corporation is not liable on preincorporation contract until it adopts the contract. Adoption maybe either express or implied.
• —unless the contract clearly provides otherwise, the promoter remains liable on pre-– incorporation contract until there is a novation.

Question 2

What are the requirements of the articles of incorporation?

Answer 2

Corporate name – must include some indication of limited liability. Number of shares the corporation is authorized to issue.
Names and addresses of incorporators and initial directors.
Name of registered agent and addresses of registered agent.
Statement of duration – MBCA presumes perpetual duration. Statement of purpose:
–MBCA presumes corporation is for all lawful purposes.
—-If limited – looks out look out for ultra vires issues.
Capital structure.

Question 3

Corporate bylaws?

Answer 3

In most states, adoption of bylaws is not a condition precedent to formation of a corporation. Therefore internal governance. Not filed with the state.

Board of Directors adopt them during organizational meeting [first meeting after court formed].

Shareholders can repeal the bylaws.

When the bylaws conflict with the articles of incorporation, the articles win.

Question 4

What control do shareholders have?

Answer 4

Direct control: shareholders generally have no right to control the day today management of their corporation. However they can if in a close corporation.

Indirect control: absent a shareholder agreement vesting direct control the corporation shareholders, shareholders have indirect control over their corporation through their power to elect directors, amend the bylaws, and approve fundamental changes the corporation.

• -shareholders elect and may remove directors.
• -shareholders may modify bylaws.
• -shareholders must approve fundamental corporate changes.

Shareholder management agreements: shareholders may enter into an agreement among themselves regarding almost any aspect of the exercise of corporate power of management. In order to do so it must be in articles of bylaw, and be approved by all shareholders at time of agreement.

Question 5

What inspection rights does a shareholder have?

Answer 5

A shareholder has the right to inspect the corporations books, papers, accounting records, etc. so long as shareholders give five days written notice of this request stating a proper purpose for the inspection. Proper person purpose is usually related to the role of a shareholder.

Question 6

Shareholders preemptive rights?

Answer 6

When the corporation proposes to issue additional shares of stock, the current stock shareholders often want to purchase some of the new shares in order to maintain their proportional voting strength. Shareholders generally do not have any preemptive rights unless the articles of incorporation so provide.

Question 7

Where the two type of shareholder meetings?

Answer 7

Annual meetings: corporations Mosholder anal meetings, the primary purpose to elect directors.

Special meetings: the Board of Directors, those authorized by articles/bylaws, and shareholders with at least 10% of the vote entitled to be cast at the meeting may call a special meeting during the year to conduct business that require shareholder approval.

Question 8

Notice as to meetings?

Answer 8

Notice: Generally notice of the shareholders meetings must be sent to the shareholders entitled to vote.

• -Time of notice: notice must be delivered not less than 10 days or more than 60 days prior to meeting.
• -contents: state the place, day, and hour of the meeting. For special meetings, the purpose for the meeting must also be stated.
• -failure to provide notice: action taken and meeting can be set aside if notice was improper.
• -treasury stock: corporation does not vote on treasury stock if it owns it on the record date.

Question 9

What are the mechanics of voting?

Answer 9

Quorum: a quorum is a majority of the votes entitled to be cast on the matter by particular voting group unless the articles provide greater quorum requirements.
–quorum not broken if people leave.
Voting: if a quorum exists, an action will be deemed approved by the shareholders if the votes cast in favor of action exceeds the votes casted against the action.
Director of elections: unless the articles provide otherwise, directors are elected by a plurality of votes cast at a meeting where there is a quorum.
–articles may provide for a cumulative voting in the election of directors only.

Question 10

Proxies as to shareholder voting?

Answer 10

Definition: a proxy is a writing [fax or email okay], sign by record shareholder, directed to secretary of Corporation, authorizing another to vote the shares.
Length of validity: 11 months unless it says otherwise.
Revocation: in writing or if shareholder shows up to vote.
–generally a proxy is revocable even if it says it is irrevocable. However, it will be irrevocable if the proxy says so and the proxy holder has some interest in the shares other than voting.

Question 11

What are shareholder voting trust?

Answer 11

Written trust, controlling how the shares will be voted, copy to the corporation, transfer legal title to the voting trustee, original shareholders received trust certificates and retain all shareholder rights except for voting.

Question 12

What is a shareholder voting agreement?

Answer 12

In writing and signed by shareholders. However, unlike voting trust, there is a split of authority a lot of these are subject to specific performance.

Question 13

When might a court pierce the corporate veil and hold shareholders personally liable for what the corporation did?

Answer 13

To do this two things must be true: (1) the shareholders have abuse the privilege of incorporating [fraud] and (2) fairness requires it. PCV has only been used and close corporations.

• -alter ego rule: if a corporation is the alter ego, agent, or instrumentality of a sole proprietorship or of another corporation, it’s separate identity may be disregarded.
• —factors: disregard of corporate formalities, lack of participation on the part of other stockholders, the failure to pay dividends while paying substantial sums.
• -under capitalization: shareholders will be personally liable for their corporations obligations if at incorporation [outset] they failed to provide adequate capitalization.

Question 14

Shareholder derivative suits?

Answer 14

Direct actions: a breach of fiduciary duty owed to the shareholder by an officer or director of a corporation is a proper subject for shareholders direct action against that officer or that director.

Derivative actions requirements: derivative action is often described as a representative action since the shareholder is enforcing the rights of another – the corporation. Recovery in a derivative action goes to the corporation rather than the shareholder.

• -shareholder must have standing
• -there must be written demand on the Board of Directors. The demand requirement places the issue squarely before the people who would be making a decision about whether or not to let the lawsuit receipt.
• —majority approach: demand is always required. If after 90 days nothing is done, shareholder may proceed with action.
• —Excuse of demand: demand will be futile it a complaint alleges with particularity that a majority of the directors are interested in the transaction.
• -dismissal of demand: if the demand was not excused, typically the Board of Directors will appoint a special litigation committee of disinterested directors to decide whether the derivative suit should go forward.
• —MBCA approach: a court will grant corporations motion for dismissal if the SLC determines in good faith that the derivative suit is not in the best interest of the corporation.
• —Delaware approach: two-step analysis almost the exact opposite of MBCA. The court first inquires into the dependent and good faith of SLC and the bases supporting its conclusion. The court then applies own independent judgment. No protection of BJR under this approach.
• -procedural requirements: corporation must also be named as defendants.

Question 15

What are the general powers of the BoD?

Answer 15

Unless the articles or a shareholder agreement provides otherwise, the Board of Directors of a corporation has general responsibility for the management of the business and affairs of the corporation.

Question 16

When are Directors elected?

Answer 16

Directors are elected at the first annual meeting of the shareholders and that each annual meeting thereafter unless the directors terms are staggered.

Question 17

When may director resign?

Answer 17

The director may resign at any time by delivering written notice to the board, its chairperson, or the corporation. The resignation takes effect when notices delivered.

Question 18

Vacancies as to Board of Directors?

Answer 18

Maybe filled by directors or shareholders. However, a vacancy on the Board of Directors created by shareholders [they vote them out] can only be filled by shareholders.

Question 19

Removal of directors?

Answer 19

Directors may be removed with or without cause by the shareholders, unless the articles provide that removal may only be for cause. However, if there’s a staggered board cause is required.

Question 20

When can the Board of Directors act?

Answer 20

The Board of Directors can only act by either having unanimous agreement in writing or a meeting.

Question 21

What type of meetings may the Board of Directors hold?

Answer 21

The Board of Directors may hold regular or special meetings. Unless otherwise provided, the board may permit any or all directors to participate in regular or special meetings by, or conduct the meetings through, the use of any means of communication by which all directors participating mat simultaneously hear each other.

Question 22

What type of notice is needed for board meetings?

Answer 22

Regular: maybe held without notice [because time, place in articles].
Special meetings: require at least two days notice of the date, time, and place of meeting, but a purpose need not be included in the notice.
–violation: if any of the above requirements are not met, the act of the BoD is void.

Question 23

Directors and proxies?

Answer 23

BoD cannot have proxy voting agreements.

Question 24

What is the quorum needed for Board of Directors meetings?

Answer 24

A majority of the Board of Directors constitute a quorum for the meeting unless a higher or lower number is required by the articles of incorporation or bylaws. Approval of action only requires majority of quorum; so if BoD is 15, quorum is 8, need 5 of 8 to pass the action.

Question 25

Liability of director?

Answer 25

The director is presumed to have concurred with the board action unless her dissent or abstention is noted in writing and corporate records [and minutes, in writing to corporate secretary, or registered letter].

Question 26

What duty of care does a director owe?

Answer 26

Burden of proof on plaintive. Directors are vested with the duty to manage the corporation to the best of their ability; they’re not ensures a corporate success, but I rather required to discharge their duties: in good faith with the care that an ordinarily prudent person and a light position would exercise under similar circumstances and in a manner that the directors reasonably believe in the best interest of the corporation. But a director is not liable if he meets the business judgment rule.

Question 27

What is the business judgment rule?

Answer 27

The business judgment rule is a presumption that the decisions made by the Board of Directors were made honestly, in good faith, on an informed basis, without any fraud, illegality, or conflict of interest. Prudent people do the appropriate homework before making a decision.
–reliance on employees: corporate boards or officers cannot be charge with wrongdoing simply for relying on information, opinions, reports, or statements, including financial statements and other financial data, if prepared by employees. But reliance on interested director is invalid.

Question 28

When will a transaction involving self-dealing not be set-aside?

Answer 28

(1) substantive fairness: the transaction, judged according to the circumstances at the time of the transaction, is established to have been fair to the corporation. The director must prove fair dealing [full disclosure of interest], fair price, and benefit the corporation. OR
(2) procedural fairness – BoD: must show a majority vote of qualified records without a conflicting interest. OR
(3) procedural fairness – shareholders: must show majority vote of qualified shareholders without a conflicting interest.

Question 29

Usurping a corporate opportunity?

Answer 29

A director cannot usurp a corporate opportunity. A corporate opportunity is one that arises when a person gets the opportunity because of their position, through corporate resources, or is closely related to the business of the corporation is expected to be in.

Question 30

What are the five duties a director of those?

Answer 30

Duty of care.  
Duty of loyalty. 
Duty of good faith. 
Duty to disclose. 
Other director liability.

Question 31

What are the rules to indemnification of an officer or director?

Answer 31

An officer or director gets sued by or on behalf of the corporation. She is incurred costs, attorneys fees, maybe even fines, a judgment or settlement. She seeks reimbursement from the corporation.

• -no indemnification: if held liable to the corporation or held to have received an proper personal benefit.
• -mandatory indemnification: if the defendant is successful in defending in action.
• -permissive indemnification: anything not in one or two [settlements].

Question 32

How are officers appointed/removed?

Answer 32

Officers are appointed by the Board of Directors only. However, the corporation has the power to remove an officer at any time, with or without cause. Shareholders do not have the power to hire and fire officers.

Question 33

What aren’t officers duties?

Answer 33

Officers duties are determined by the bylaws, or to the extent consistent with the bylaws, or by the board.
– officers have the same duty of care as a board member.

Question 34

What are the powers of an officer?

Answer 34

The officers are agents of the corporation receive their power to manage from the directors. The ordinary rules of agency determine authority and powers of the officers and agents. Authority maybe actual or apparent. If Torey exist actions taken by an officer or agent [such as entering into a contract] find a corporation.

• -actual authority: and officers actual authority includes not only the authority expressly granted to the officer by the directors, the bylaws, the articles, and statutes, but also any authority that may be implied by the express grant.
• -apparently authority: when the corporation holds out an officer possessing certain authority, thereby inducing other reasonably to believe that the authorities exist, the officer has apparent authority to act and to bind the corporation even though actual authority to do so has not been granted.

Question 35

Must distributions from a corporation be made?

Answer 35

They are completely in the board of directors discretion, cannot compel distributions absent a strong case in equity.
–A corporation can declare a distribution as long as the corporation is not insolvent or if the distribution would render insolvent. Insolvent means either: the corporation is unable to pay debts as they come due, or its assets are less than liabilities.

Question 36

Fundamental corporate change?

Answer 36

Board of Directors: BoD approval according to the proper voting requirements of a resolution recommending final corporate change. Written approval given to shareholders to vote on.

Shareholders: notice to all shareholders and approval by shareholders according to heighten standard of voting. Must be an approval by majority of those shares entitled to vote. [As opposed to regular shareholder voting where all you need is a majority of the shares the show up for the quorum].

Question 37

What is right of appraisal?

Answer 37

In a closed corporation be right of appraisal is the right of a shareholder to force the corporation to buy her shares at fair value. This is a shareholder soul remedy for these fundamental changes unless there’s fraud.
–The shareholder must before shareholder vote, file with the corporation written notice of objection and intent to demand payment; abstain or vote against the proposed change and after the vote, make written demand to be bought out.

Question 38

Amendments to the articles of incorporation?

Answer 38

A corporation may amended articles at any time to add or change a provision that is required or permitted, or to delete a provision that is not required.
–almost all changes to the articles of incorporation other than slight modifications to names or addresses or duration must be voted on by shareholders.

Question 39

What is dissolution?

Answer 39

Dissolution is the termination of the corporate existence. To dissolve the corporation, some act must be taken either by the corporate members or through involuntary judicial proceedings.
–dissolution is not the end of the corporation. It is the beginning of a process that will end the corporate existence. The task now is to wind up.