Corporations Flashcards
FORMATION
People, paper, act:
People: - Organizers - Paper: - COF Act - Organizers sign COF - Deliver to SOS (corp existing begins at SOS’s filing)
FORMATION
Paper:
- COF (required and optional):
Paper:
- COF - Corp name (can’t be misleading—e.g. can’t be “Bank” if you’re not a bank) - Name/address of each organizer - Number of initial directors - Name/address of each director - Registered agent - Statement of purpose (“engage in all lawful activity”) - Capital structure: - Authorized stock - Number of shares per class - Par value - Voting rights - Pre-emptive rights (optional) - Close corp status (optional) - Cumulative voting (optional)
FORMATION
Ultra vires acts
Ultra vires acts
- Anything beyond the scope of the Statement of Purpose in COF
- The K is VALID—not VOID as under common law
- ONLY way to challenge these acts:
- SHs can seek an injunction (ONLY available if all parties are before the court)
- The CORP can sue responsible managers for losses
- TXAG can seek injunction
FORMATION
organizational meeting
organizational meeting
- Give 3 days NOTICE of the organizational meeting*
At the meeting
- Select officers
- (BOD already chosen in COF)
- Adopt BYLAWS (unless a close corporation)
- Anything else they want to do
S corp
S corp
- Fewer than 100 SHs
- Only one class of stock, not publicly traded
- No double taxation—the corp doesn’t pay tax on its income, but SH’s still pay taxes on their distributions
DE FACTO and ESTOPPEL
- This doctrine may have been abolished in TX—it’s at least disfavored.
- Applies ONLY IN CONTRACTS*
- Cannot avoid tort obligations by asserting that you were a de facto corporation*
“De facto” corporation.
- There is a relevant incorporation statute (TBOC)
- Good faith, colorable attempt to comply
- Exercised corporate privileges (acted like a corp)
Estoppel
- If a third party treats you like a corp, they are estopped from arguing otherwise later.
BYLAWS
Are they necessary?
Amending the bylaws:
What if the COF conflicts?
BYLAWS
EVERY corporation—except close corp—must have bylaws
Govern internal management, not filed with SOS
Amending the bylaws
- SHs can amend
- BOD can ament
- COF can limit who can amend
COF trumps any conflicting language in the bylaws.
PRE-INCORPORATION K’s
When is CORP liable?
Promoter liability:
PRE-INCORPORATION K’s
Corporation is NOT liable on pre-incorporation K’s unless it ADOPTS them.
- Express action of the BOD
- Implied, accepting the benefit of the K
Promoter liability
- Unless the K says otherwise, the promoter IS LIABLE
- UNLESS there is a novation (adoption is not enough)
ISSUANCE OF STOCK
Who authorizes issuance?
ISSUANCE OF STOCK
BOD authorizes issuance
ISSUANCE OF STOCK
Outstanding:
Treasury:
Issued:
Outstanding: in the hands of a SH
Treasury: has been issued before, but is now back in the hands of corp
Issued: sold to a SH at least once
ISSUANCE OF STOCK
Subscriptions—when are they revocable?
Revocable
- PRE-incorporation subscriptions are IRREVOCABLE for 6 MONTHS
- POST-incorporation subscriptions are revocable until ACCEPTED by the corp (BOD accepts and NOTIFIES the subscriber in writing)
ISSUANCE OF STOCK
Consideration
Consideration
- REQUIRED—otherwise you have watered stock
- Par value
- Minimum issuance price
- Can change this in the COF
- “No par” = no min price for the stock
- TREASURY stock has NO PAR VALUE, can be sold for any price
- When stock is sold, BOD determines the VALUATION for the consideration received. This is considered valid, unless fraud.
WATERED STOCK LIABILITY
Director liable IF:
Purchaser liable IF:
Subsequent third party purchaser liable IF:
WATERED STOCK LIABILITY
Selling stock for less than par value = watered stock. Someone has to pay.
Director liable
- IF KNOWINGLY authorized
Purchaser liable
- No defense. Purchaser is charged with notice of par value.
Subsequent third party purchaser
- IF purchased with NOTICE of the water
PRE-EMPTIVE RIGHTS
When can SH assert these rights?
PRE-EMPTIVE RIGHTS
New issuance of stock FOR MONEY that will dilute the percentage of ownership by existing SHs. SH has the right to purchase some of the stock to maintain his same share of ownership.
- COF must OPT IN to create these rights—if silent, no pre-emptive rights
- NO PRE-EMPTIVE RIGHTS for stocks sold for money within 6 MONTHS OF FORMATION
SH RIGHT TO INSPECT BOOKS
SH has a right to inspect books IF:
SH RIGHT TO INSPECT BOOKS
SH has a right to inspect books IF:
- Owned shares for 6 months, or owns 5% of outstanding shares
AND
- Makes a written demand for a PROPER PURPOSE (reasonably related to interests as a SH)
Corp owes SH expenses if SH has to enforce the right.
BOD
How many DRs?
How many DRs?
- Initially set in the COF
- BYLAWS can change this
BOD
Who elects them?
Election
- SH’s elect directors at the annual meeting
- Classified/staggered elections can be set in the bylaws
BOD
How can a director be removed?
Removal
- SH’s, by majority vote
- With OR without cause
BOD
If there’s a vacancy, who fills it?
Vacancy
- SH’s or the BOD can fill the vacancy
BOD MEETINGS:
- Notice:
- Quorum:
- Voting:
BOD MEETINGS:
- Notice:
- Required for SPECIAL meetings
- Time
- Place
- Not required for regular meetings
- Failure to give notice VOIDS action taken at the meeting
- UNLESS the DR waived in writing or by attending and not objecting
- Required for SPECIAL meetings
- Quorum
- Maj of BOD
- Broken if someone leaves
- Voting
- BOD action = majority vote of those present
- DR’s CANNOT vote by proxy or sign voting agreements
DIRECTOR LIABILITY
Which DR’s are liable?
Ways to get out of liability:
DIRECTOR LIABILITY
Which DR’s are liable?
- BOD is presumed to have acted with consent of ALL DR’s
- Ways to get out of liability:
- Objected in WRITING
- Put in the minutes
- Send note to corp secretary (Joan) at the meeting
- Reg letter to corp sec immediately after the meeting
- Absent (e.g. sick that day)
- Good faith RELIANCE on information provided by a competent professional
- Objected in WRITING
BOD DUTY OF CARE
DUTY OF CARE
- DR must act in GOOD FAITH and exercise ordinary care—must do what a REASONABLY PRUDENT PERSON would do under the circumstances.
- P has the BOP—must show HARM to the corp
*BJR applies
BOD DUTY OF LOYALTY
DUTY OF LOYALTY
- DR must act in GOOD FAITH and with reasonable belief that her act is in the CORPORATION’s BEST INTEREST.
- DR has BOP
BOD DUTY OF LOYALTY
Interested DR transaction (DR benefits personally from the corp obligation)
Interested DR transaction (DR benefits personally from the corp obligation)
- DR must show:
- The deal was fair when approved
- OR
- DR disclosed his interest and all material facts, and EITHER the SH’s or the BOD approved the deal
DUTY OF LOYALTY
Competing ventures
Competing ventures
- DR must show:
- Approval by majority of disinterested DRs
- Remedy: constructive trust on the profits
DUTY OF LOYALTY
If a DR wants to avoid liability for a COMPETING VENTURE transaction or an INTERESTED DIRECTOR transaction, must he show BOD approval or SH approval of his action?
Interested DR»_space;> SH or BOD
Competing venture»_space;> BOD
