Corporations Flashcards
Formation Requirements: People, Paper and Act
People = Organizers
- 1 or more who executes certificate and delivers to SoS
- person or entity is OK
- no need to be TX resident
Paper = Certificate of Formation (Articles of Incorporation)
- K b/t corporation and SHs
- K b/t corporation and state
- Information in certificate includes:
(1) Names and addresses for corp. (can reserve corp. name for 120 days before)
(2) Names and addresses for each organizer
(3) Number of initial directors
(4) Names and addresses of each initial director or whoever will manage
(5) Name of corporate “registered agent” and post office address for service of process
(6) Statement of purpose (can be all lawful activity; but if specified, beware of ultra vires activity)
(7) Capital structure (Authorized Stock = max # corp. can sell; # of shares per class; and par value info, voting rights, and preferences of each class)
Act = sign and delivery certificate to TX SoS and pay required fee
- De Jure Corp. is born!!!
- SoS files it and sends acknowledgment of corp. of filing
- Electronic submission and fax of signature are OK
- BoD then gives 3 days’ notice and holds organizational meeting to (1) select officers (2) adopt bylaws and (3) transact other company business
Bylaws
MUST have them unless a close corp.
Not filed with SoS; just internal
Adopted by BoD at organizational meeting
Can be repealed, amended or new ones adopted by BoD or SHs (certificate can reserve this power to SHs exclusively)
If bylaws conflict with certificiate of formation, certificate takes precedence, except bylaws can set # of directors
Pre-incorporation Ks
Promoter (P) = person acting on behalf of corp. not yet formed; might contract with TP on behalf of corp. not yet formed
Corp. is NOT liable until it ADOPTS the K (can be express by board action or implied of corp. accepts a benefit of the K) (+ P is still liable after adoption)
P = liable unless the K clearly says otherwise, until there is NOVATION (an agreement b/t promoter and corp. and the other contracting party that the corp. replaces the promoter under the K and effectively releases him)
Foreign Corporations
Foreign = anything outside TX
If transacting business (intrastate transactions on a recurring basis; regular course of business) in TX, must qualify and pay prescribed fees
Qualify by getting a certificate of authority from SoS; apply giving basic info and proving good standing in home state
Violation = civil fine + corp. can’t sue in TX on claim arising from business in TX (although it can be sued and defend)
Issuance of Stock
Issuance = when corp. sells its own stock to raise capital
Subscriptions = written, signed offers to buy stock from corp.
- Pre-incorporation subscriptions are irrevocable for 6 mo. unless it says otherwise or all subscribers agree to let you revoke
- Post-incorporation subscriptions are revocable until accepted by the corp. (when BoD accepts offer and corp. notifies subscribers in writing)
Consideration for corp.’s issuance of stock = any tangible or intangible benefit to the corp (i.e., money, discharge of debt, property, services already rendered, notes and Ks for future services)
- Par = minimum issuance price set in certificate
- No par = BoD can set any price
- BoD’s valuation of consideration received is conclusive absent fraud
Treasury stock = stock that was previously issued and has been reacquired by the corp.
- it is authorized and issued but NOT outstanding
- corp. can then resell it and treat it as NO par always
Watered Stock
When par stock is issued for less than PV
The corporation (or its creditors if the corp. is insolvent) can reach:
(1) Directors if they knowingly authorized the issuance, and
(2) the buyer of the stock (no defense! he’s charged with notice of PV)
- if buyer transfers to TP, that TP is NOT liable if she did not know about the water
Pre-emptive Rights
The right of an existing SH of common stock to maintain her percentage of ownership by buying stock whenever there is NEW issuance of stock FOR MONEY
Includes issuance of treasury stock
If not mentioned in certification of formation, there are no preemptive rights
NO preemptive rights if issuance is within 6 mo. of formation of the corp. (unless certificate says otherwise)
S Corp. v. C Corp.
S Corp.
- have 100 or fewer SHs, all of whom are human US citizens or residents
- only 1 class of stock allowed
- NOT publicly traded
C Corp.
- pays tax on income
- Double taxation at both levels
Liability Generally
If corp. incurs a debt or breaches a K or commits a tort:
- Directors/officers are NOT liable
- SHs are NOT liable
- the corp. itself is liable
De Facto Corporation
This doctrine MAY be abolished in TX, but can bring it up on an essay where attempt to form de jure corp. failed
Requirements:
- relevant incorporation statute (in TX it’s the TBOC)
- the parties made a good faith, colorable attempt to comply with it
- some exercise of corporate privileges (acting like we have a corporation)
Result = business is treated as a corp. for all purposes (K cases and tort cases) except in an action by the state (that would be quo warranto)
Corporation by Estoppel
This doctrine MAY be abolished in TX, but can bring it up on an essay where attempt to form de jure corp. failed
Idea = one who treats a business as a corp. may be estopped from denying that it is a corp.
Can also prevent the business from avoiding liability by saying it was anot a proper “corporation” when it entered a deal
Generally applies to K cases but NOT tort cases
Statutory Requirements: Directors
Number = 1 or more adult natural persons (set in certificate or bylaws)
Election = by SHs at annual meeting
- bylaws can provide for “classified board” which divides board by half or thirds, with half or 1/2 elected each year
Removal before term expires = by SHs by vote of majority of shares entitled to vote w/ or w/out cause
Vacancy on BoD = BoD or ShS select person who serves the remainder of the term
BoD must act as a group in 1 of 2 ways (or, if action doesn’t comply, it can be ratified by a subsequent valid act):
(1) Unanimous written consent to do something (email/fax are OK)
(2) A meeting that satisfies quorum and voting requirements
Individual D is NOT an agent of corp. and does NOT have authority to speak for or bind the corp.
OFFICERS (as opposed to directors) are agents of corp.
Board of Directors’ Meetings
Conference call counts! Email notice is OK if D authorizes it
Notice of board meetings:
- Regular meetings = NOT required
- Special meetings = YES must state time and place
Failure to give proper notice voids whatever was done at the meeting UNLESS defect is waived by person not notified either (1) in writing anytime or (2) by attending the meeting without objection
Ds CANNOT give proxies for how they will vote as Ds!
Ds CANNOT enter voting agreements for how they will vote as Ds (void against public policy)
Quorum = majority of all Ds (unless certificate/bylaws say otherwise)
- required for any board meeting
- if we have a quorum, passing a resolution requires only a majority vote of those who are PRESENT
BoD: Duty of Care
Ds manage the business; set policies, supervise officers, declare distributions, decide about stock issuance, recommend fundamental corporate changes to SHs, etc.
Burden is on plaintiff
Duty of care standard = must act in good faith and exercise ordinary care and prudence of a prudent person
(1) Nonfeasance (BoD does nothing) = D is liable ONLY IF breach caused a loss to the corp. (causation)
(2) Misfeasance (BoD does something that hurts the corp.) = liability can be avoided if Business Judgment Rule (BJR) applies to good faith, informed decision with rational basis
BoD: Duty of Loyalty
Burden on defendant
Duty of loyalty standard = D must act in good faith and with reasonable belief that her act is in the corporation’s best interest
BJR does NOT apply!!! (b/c we are dealing with conflict of interest)
Interested D Transaction = any deal b/t corp. and 1 of its Ds (or D’s close relative or another of D’s businesses) will be set aside UNLESS D shows
(1) deal was fair to the corp. when approved, OR
(2) her interest and the material facts were disclosed or known and the deal was approved in good faith by either (i) SHs or (2) majority of disinterested Ds (interested Ds count toward quorum)
Competing Ventures = D cannot compete without approval of disinterested majority of Ds
- Remedy = constructive trust on profits
Corporate Opportunity = D cannot usurp a corp. opportunity he has reason to know the corp. would be interested in until he (1) tells the BoD, and (2) waits for the BoD to reject the opportunity (i.e., renounce it in cert. of formation or by BoD action)
