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Can be repealed, amended or new ones adopted by BoD or SHs (certificate can reserve this power to SHs exclusively)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)
Director Liability: Improper Loans/Distributions
BoD may vote to lend a D $ (corporate funds) if the BoD reasonably expects the corp. to benefit from it
General rule = D is presumed to have concurred with board action UNLESS her dissent or abstention is noted IN WRITING in corporate records by
(1) having it put in minutes, or
(2) sending a note to corp. secretary at meeting, or
(3) sending registered letter to corp. secretary immediately after the meeting
- ORAL dissent by itself is NOT effective!
Defenses to liability:
(1) you were absent from the meeting
(2) good faith reliance on information represented as correct by an officer or provided by a competent professional, or by an employee or committee
Corporate Officers
Same duties of CARE and LOYALTY as directors!
Duty of care standard = must act in good faith and exercise ordinary care and prudence of a prudent person
Duty of loyalty standard = must act in good faith and with reasonable belief that her act is in the corporation’s best interest
Officers (at least a President and a Secretary) = AGENTS of corp. who bind the corp. by acts within their authority
Corporate Officers: Selection and Removal
BoD selects and removes officers
BoD also sets officer
Remedy for wrongful removal = may have breach of K claim for damages
- Corp. MUST indemnify officer if she wins a judgment on the entire case (whether on the merits or technicality or w/e)
- Corp. MAY indemnify (i.e., if a case settles and doesn’t qualify above) if officer acted in good faith and with reasonable belief that her actions were in the corporations best interests (duty of loyalty)
- Determining eligibility = (1) maj. of vote of disinterested Ds or disinterested shares or (2) independent legal counsel
- Court can ALWAYS order reimbursement to director/offier who gets sued if it finds it justified
Certificate can eliminate D/O liability for damages, but NEVER for willful or intentional misconduct
Shareholders Generally and Close Corporations
Do NOT manage the corp. (because the BoD does!)
Close corp. = few SHs and stock is NOT publicly traded
- can have BoD but doesn’t have to
- instead SHs can manage, or a single manager (who owes duties of care and loyalty to corp.)
- certificate MUST say “this is a close corp.”
- SHs’ agreement can authorize change in management structure in (1) certificate/bylaws or (2) written agreement of all the SHs
- Stock certificates should note close corp. status
- SHs do NOT generally owe fiduciary duties to each other (but court can find fiduciary duty i.e, in case of SHs freezing someone out)
Changing corp. status: file Statement of Operation agreement with SoS (public record = notice to all)
Close Corporations: Piercing the Corporate Veil (PCV)
NEVER automatic; make the argument!
ONLY CLOSE CORPORATIONS!
SHs (remember this includes a parent corp. if SH is entity) are generally not liable, but court may PCV to hold SHs personally liable if:
(1) they have abused the privileg eof incorporating; and
(2) limited liability would be unfair
Alter ego theory = SH treats corporate assets as his own while screwing over a creditor
Undercapitalization theory = SHs failed to invest enough to cover prospective liabilities (i.e., a dangerous business with no insurance)
- Likely in TORT cases! Not K cases!
Shareholder Derivative Suits
SH is suing to enforce the corporation’s claim, not her personal claim
Ask: could corp. have brought this suit? (i.e., for breach of duties of care/loyalty that are owed to the corp.)
Requirements:
(1) SH owed stock when the claim arose or have gotten it by “operation of law” (inheritance or divorce decree) from someone who did
(2) must fairly and adequately represent the corp.’s interests
(3) must make written demand (w/ nature of claim with particularity) on directors that the corp. bring suit at least 90 days before filing unless it gets rejected or it would cause irreparable harm to corp.
(4) Corp. must be joined as a D
Settlement or dismissal only with court approval (but court MUST dismiss if determination that suit is not in corp.’s best interest is made in good faith by independent disinterested directors)
If SH wins corp. gets the $ and SH recovers costs and attorney’s fees from corp.
If SH loses, SH does not recovery costs/attorney’s fees!
- also liable to defendant for attorney’s fees if court finds SH sued without reasonable cause or for an improper purpose
Shareholder Voting and Proxies
General rule = you vote if you are the record SH (person shown as owner in corp. records) as of the record date (some cutoff date no more than 60 days before meeting)
Exceptions
- Corp. reacquires stock from SHs before the record date (corp. is record owner of this treasury stock so it does NOT get voted)
- SH dies = executor can vote his shares
- Proxy is a
(1) writing (fax/email are OK)
(2) signed by record SH
(3) directed to secretary of corp.
(4) authorizing another to vote the shares - Only lasts 11 months unless it says otherwise
- Can be revoked even if it states it’s irrevocable UNLESS it’s a proxy coupled with an interest (i.e., an option)
Voting Trusts and Voting Agreements
Requirements for VOTING TRUST:
- written trust agreement controlling how the shares will be voted
- file a copy with the corp.
- transfer legal title of shares to voting trustee
- original SHs receive trust certificates and retain all SH rights other than voting
Requirements for VOTING (POOLING) AGREEMENT:
- in writing
- copy delivered to corp.
- enforceable against transferees if stock certificates conspicuously note the agreement
- CANNOT agree as to how they will act once they’re elected directors!!! (void)
SH Voting: Valid Corporate Action
2 ways of acting:
(1) Unanimous consent in writing and signed or by electronic transmission of holders of all voting shares, or
(2) a meeting that satisfies quorum and voting rules
2 kinds of meetings:
(1) Annual meeting MUST be held to elect directors (if not held within 13 mo., a SH may petition court to order one)
(2) Special meeting can be called by (i) BoD (ii) corp. president (iii) the holders of at least 10% of the shares entitled to vote, or (iv) anyone else permitted in the certificate
Written notice MUST be given to every SH entitled to vote for EVERY meeting (annual or special) b/t 10 and 60 days before the meeting (21-60 days if meeting is to consider a fundamental change)
- email OK if SH consents
- contents MUST state when, where, and purpose of meeting (because they can’t do anything else!)
- Failure = any action taken at meeting is VOID UNLESS those not notified or given defective notice waive the defect (express in writing anytime or implied by attending meeting w/out objection)
