Corporations Flashcards
The Georgia Business Corporation Code, O.C.G.A. title 14, chapter 2, governs Georgia Corporations.
1
Q
What are “Articles of Incorporation”?
A
The articles of incorporation must be filed to incorporate, but they need not spell out the manner in which the corporation is to be governed.
2
Q
What are “Articles of Correction”?
A
If the articles of incorporation contain an inaccuracy or were defectively executed, then articles of correction may be filed with the state to correct the inaccuracy or defect.
3
Q
What are “Bylaws”?
A
The bylaws may contain any lawful provision for the management of the corporation’s business or the regulation of its affairs that is not inconsistent with the articles of incorporation. When there is a conflict between the articles of incorporation and the bylaws, the articles of incorporation control.
4
Q
Who adopts the Corporate Bylaws?
A
Generally, the board of directors adopts the initial bylaws.
However, a majority vote by either the directors or the shareholders can adopt, amend, or repeal a bylaw.
5
Q
What is an “Organizational Meeting”? When is it held?
A
Once the articles of incorporation are filed, an organizational meeting is held at which the appointment of officers, adoption of bylaws, and approval of contracts may take place.
When the incorporators hold the meeting, election of the board of directors also takes place.
6
Q
What must be included in a corporation’s articles of incorporation?
A
The articles of incorporation must set forth the following basic information about the corporation:
- its name,
- the number of shares it is authorized to issue,
- the street address of the initial registered office and the name and address of its registered agent,
- the name and address of each incorporator, and
- the mailing address of its initial principal office, if different from the initial registered office.
7
Q
What restrictions are placed on a Corporation’s name?
A
The corporation’s name must contain the word “corporation,” “company,” “incorporated,” “limited,” or an abbreviation thereof.
The corporate name must distinguish the corporation from any other corporation incorporated or authorized to transact business in Georgia.
8
Q
How must the articles of incorporation provide for the corporate purpose?
A
In Georgia, the articles of incorporation do not need to include a statement of the corporation’s purpose.
A corporation has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation.
9
Q
What are the statutory powers granted to corporations by default?
A
- To sue or be sued;
- To have a corporate seal;
- To make and amend bylaws;
- To purchase and transfer rights in real or personal property;
- To contract and incur liabilities;
- To lend money, invest funds, and hold property;
- To be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity;
- To elect directors and appoint officers;
- To establish pension and profit-sharing plans;
- To make donations for the public welfare or for charitable, scientific, or educational purposes;
- To transact lawful business that will aid governmental policy; and
- To make payments or donations in furtherance of the corporate business.
10
Q
What is the default durration for a corporation?
A
A corporation has perpetual duration, unless otherwise provided in the articles of incorporation or in an amendment to the articles of incorporation.
11
Q
What restrictions are placed on the Registered Agent?
A
A corporation must maintain a registered office and a registered agent in Georgia.
A registered agent may be any of the following individuals or entities whose business office is also the registered office of the corporation:
- a person who resides in Georgia,
- a domestic corporation or nonprofit domestic corporation, or
- a foreign corporation or nonprofit foreign corporation authorized to transact business in Georgia.
12
Q
What are the technical filing requirements for a corporation’s articles of incorporations?
A
The articles of incorporation must be:
- in English,
- typewritten or printed,
- signed by the chairman of the board of directors, an officer, an incorporator, or other fiduciary, and
- filed with the secretary of state along with a filing fee.
The secretary of state may authorize the filing of the articles by electronic transmission. The legal existence of a corporation begins when the articles of incorporation are filed by the secretary of state.
13
Q
Can a corporation generally commit an ultra vires action?
A
In general, the validity of a corporate action may not be challenged on the ground that the corporation lacks or lacked the power to act.
However, when a corporation that has stated a narrow business purpose in its articles of incorporation subsequently engages in activities outside that stated purpose, the corporation has engaged in an ultra vires act.
14
Q
Under what mannor may a corporate action be challenged as an ultra vires act?
A
- A shareholder can file suit to enjoin the corporation’s ultra vires action;
- The corporation can take action against a director, officer, or employee of the corporation who engages in such action; or
- The state through the attorney general can initiate a proceeding against the corporation to enjoin its ultra vires action.
15
Q
May a corporation be bound by an ultra vires agreement?
A
When a corporation knows of the ultra vires act and retains the benefits of an unauthorized contract executed on its behalf without authority, the corporation may be bound because of ratification, and it cannot use ultra vires as a defense for its liability.
16
Q
May a corporation be enjoined from committing an ultra vires act?
A
In an action by a shareholder to enjoin an ultra vires act, it will be enjoined only if it is equitable to do so.
17
Q
What is the effect of de jure corporation?
A
The corporation, rather than persons associated with the corporation (i.e., shareholders, directors, officers, and other employees), is liable for activities undertaken by the corporation.
18
Q
What is the effect of a lack of good-faith effort to incorporate?
A
A person that conducts business as a corporation without attempting to comply with the statutory incorporation requirements is personally liable for those business transactions.
19
Q
What is the effect of a defective incorporation despite a good-faith effort to incorporate?
A
When a person makes an unsuccessful effort to comply with these incorporation requirements, that person may be able to escape personal liability under either the de facto corporation or corporation by estoppel doctrine.
20
Q
What is a “De facto corporation”?
A
Under Georgia law, any person who enters into contracts with knowledge that there was no incorporation is personally liable for all liabilities created.
This statute requires culpable knowledge. Thus, if a promoter acts, believing that the corporation exists, then there is no liability.
21
Q
What is “Corporation by estoppel”?
A
A person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner.
This doctrine does not apply if the promoter has knowledge that the corporation does not exist. This doctrine is limited to contract actions.
22
Q
May a corporation amend its articles of incorporation?
A
The corporation can amend its articles with any lawful provision. The procedure for securing approval to amend the articles of incorporation varies depending on whether the corporation has issued stock. Once the necessary approval is obtained, articles of amendment must be filed with the state.
23
Q
How may a corporation amend its articles if no stock has been issued?
A
If the corporation has not issued stock, then the board of directors—or, if the board does not exist, the incorporators—may amend the articles of incorporation.
24
Q
How may a corporation amend its articles of incorporation if stock has been issued?
A
If stock has been issued, then corporations generally must follow a two-step approval process:
i) The board of directors must adopt the amendment to the articles of incorporation; and
ii) The board must submit the amendment to the shareholders for their approval by majority vote.
25
Who is a "promoter"?
Before the formation of a corporation, a **promoter** engages in activities, such as procuring capital and entering into contracts, to bring the corporation into existence as a business entity.
26
Who holds the liability for pre-incorporation agreements?
All persons purporting to act on behalf of a corporation, knowing there was no incorporation, are jointly and severally liable for all liabilities created while so acting, even after the corporation comes into existence, unless a subsequent novation releases the promoter from liability.
27
What is a common novation agreement in corporate law?
A **novation** is an agreement between all the parties releasing the promoter from liability and substituting the corporation. If a party who contracts with a promoter agrees to look to some other person or fund for payment, then the promoter is not personally liable.
28
What fiduciary duties does a promoter possess regarding the corporation?
A promoter stands in a fiduciary relationship with the pre-incorporated corporation.
The promoter can be liable to the corporation for violating a fiduciary duty, such as failing to disclose a commission on a pre-incorporation transaction.
29
What is a promoters right to reimbursement?
Although a promoter can seek compensation for pre-incorporation activities undertaken on the corporation’s behalf and reimbursement for related expenses, the promoter **cannot** compel the corporation to make such payments, because the promoter’s acts, while done to benefit the corporation, are not undertaken at the corporation’s direction.
30
What is the general rule regarding a promoters pre-incorporation transaction liablties?
A corporation is **not** liable for pre-incorporation transactions entered into by a promoter. The fact that the promoter entered into the transaction to benefit a future corporation is **not** sufficient to hold the corporation liable.
Because a corporation is **not** necessarily in existence during a pre-incorporation transaction, a principal-agent relationship does **not** exist between the corporation and the promoter.
31
What is the exception to general rule regarding a promoters pre-incorporation transaction liablties?
The corporation can be liable when the corporation adopts, accepts, or ratifies the contract made by the promoter. If the corporation accepts the benefits of the contract, then it is generally required to perform the obligations of the contract.
32
How does a corporation adopt a promoter's contracts?
Adoption of a contract can be express **or** implied.
Adoption takes place when the corporation accepts the benefits of the transaction **or** gives an express acceptance of liability for the debt, such as through board resolution after incorporation.
33
Who is an incorporator? What liablities do an incorporator accept?
An incorporator is a person who signs and delivers the articles of incorporation to the secretary of state for filing.
By performing these acts, an incorporator does not engender liability for a contract entered into by a promoter of the corporation.
34
What are the two types of securities offered by a corporation?
Traditionally, there are two broad types of securities by which a corporation secures financing for its endeavors—**stocks**, which carry ownership and control interests in the corporation, and **debt securities** (such as bonds), which do not.
35
Must a corporation issue stock?
**Every** corporation is required to have stock that:
* entitles the holder to vote on matters of corporate governance (e.g., the election of directors to the board) and
* represents the basic ownership interest in a corporation (e.g., the right to receive net assets on dissolution).
36
The articles of incorporation may authorize what classes of stock?
The articles of incorporation may authorize classes of stock that
* have conditional or limited voting rights,
* entitle the holder to particular distributions, and
* have preference over other classes with respect to distributions.
37
What are "common stock"?
Stocks that provide the holder with voting rights and ownership rights.
38
What are "preferred stock"?
Stocks having preference over other stock to such items as distributions.
39
Who is authorized to issue stock?
Unless otherwise specified in the articles of incorporation, the issuance of stock must be authorized by the board of directors.
40
How many shares may a corporation issue?
A corporation may issue as many shares as allowed under the articles of incorporation.
41
May a corporation issue "fractional shares"? Scrip?
A corporation may issue fractional shares.
The corporation may also issue a **scrip** that represents a fractional share, which entitles the holder to a full share upon surrendering enough scrip to equal a full share.
42
What rights do fractional shareholders possess?
A fractional shareholder has all the rights of a full shareholder. Nevertheless, a scrip holder may not exercise any shareholder rights unless the scrip specifically allows for such rights.
43
May the board of directors place restrictions on scrip?
The board of directors may place conditions on a scrip, including making the scrip void if not exchanged by a specific date for full shares, or allowing the shares for which the scrip is exchangeable to be sold to others, with the proceeds going to the scrip holders.
44
What is "par-value stock"?
A corporation may, but is not required to, issue par-value stock.
For such stock, the corporation is required to receive at least the value assigned to that stock (i.e., **par value**), which need not be its market value, before the stock can be issued.
The amount of par value may be specified in the articles of incorporation.
45
What is "watered stock"? Can a corporation issue it?
**Water stock** is stock issued for consideration less than par value.
Because stock is deemed validly issued, paid in full, and non-assessable once the corporation receives adequate consideration (as determined by the board of directors), the GBCC does not recognize the issue of liability for watered stock.
46
What revocability does stock subscriptions possess?
A written, pre-incorporation subscription is irrevocable for six months from the date of the subscription, unless the subscription agreement provides otherwise or all the subscribers agree to revoke it.
47
What occurs if the subscription defaults?
If the subscriber defaults, the corporation may collect the amount owed as any other debt.
In the alternative, unless the subscription agreement provides otherwise, the corporation may rescind the agreement and sell the stock to someone else if the debt remains unpaid more than 20 days after the corporation sends written demand for payment to the subscriber.
48
What is the mandatory "Annual Meeting"?
A corporation is required to hold a shareholders’ meeting each year.
Generally, the time and place of the meeting are specified in the corporate bylaws.
The primary purpose of the annual meeting is to elect directors, but any business that is subject to shareholder control may be addressed.
49
When may a corporation host a special meeting?
A corporation may also hold a special meeting, the purpose of which must be specified in the notice of the meeting.
Generally, a special meeting may be called by the board of directors or shareholders who own at least 25% of the shares entitled to vote at the meeting. The articles of incorporation or bylaws may set a higher or lower percentage.
For a corporation that has 100 or fewer shareholders, a special meeting may be called by shareholders who own at least 25% of the shares entitled to vote, or a lower percentage as set forth in the articles of incorporation or bylaws.
50
What is the notie requirement for a special meeting and annual meeting?
Shareholders entitled to vote at a meeting must be given notice of either type of meeting.
Notice of a special meeting must include a description of the purpose for which the meeting is called. The notice must include the time, date, and place of the meeting. Usually, notice must be given no less than 10 days and no more than 60 days before the meeting date.
A shareholder may waive notice either in writing or by attending the meeting.
51
What alternative may a corporation use to take shareholder action instead of the voting at a meeting?
Instead of voting at a meeting, all shareholders may take any action that could have been undertaken at a meeting by unanimous written consent.
52
What is required to vote at a shareholder meeting?
There are two basic issues regarding shareholder voting:
1. who the owner of the stock is and
2. when such ownership is measured.
53
How does a corporation handle the "ownership" issue regarding shareholder voting rights?
A corporation must maintain a list of shareholders who are entitled to vote (i.e., record owners).
A beneficial owner is generally not entitled to vote at a meeting of shareholders. A person who is not a record owner may nevertheless be entitled to vote.
Similarly, a guardian for an incompetent or a personal representative of a decedent’s estate may compel the corporation to allow her to vote in lieu of the record owner.
Voting rights issues may also arise when stock is jointly held.
54
How does a corporation handel the transfer issue?
A record date for determining shareholders who are entitled to notice of and who are entitled to vote at an annual or special meeting is established; typically, the record date is fixed by the board of directors. The bylaws may also fix the record date or provide the manner for fixing the record date.
55
Under Georgia Corporate law, what is the temporal requirement for the record date?
The record date may not be more than 70 days before the meeting. The owner of the stock at the close of business on the record date has the right to vote the stock at the upcoming meeting.
If not otherwise set, the record date is the close of business on the day before the first notice of the meeting is delivered to the shareholders.
56
What is the general quorum requirements for voting?
For a decision made at a shareholders’ meeting to be valid, there must be a quorum of the shares entitled to vote present at the meeting. Generally, the required quorum is a majority of the votes entitled to be cast on a matter. A share that is present for any purpose at a meeting, other than to object to the holding of the meeting or transacting business at the meeting, is deemed present for quorum purposes.
The articles of incorporation or a bylaw adopted by the shareholders may provide for a greater or lesser quorum **but** cannot set quorum at less than one-third of the votes entitled to be cast.
57
What is required to appoint a shareholder proxy?
A proxy appointment must be executed in a signed writing or an electronic transmission form and delivered to the corporation or its agent. A proxy is valid for 11 months unless otherwise specified.
58
Is a shareholder proxy agreement revokable?
A proxy is revocable unless it expressly provides that it is irrevocable and the appointment of the proxy is coupled with an interest. When that interest is extinguished, the proxy is considered revoked.
59
What are considered "proxy coupled with an interest"?
An appointment of a proxy coupled with an interest includes the appointment of:
* A pledgee;
* A person who purchased or agreed to purchase the shares;
* A creditor of the corporation who extended it credit under terms requiring the appointment;
* An employee of the corporation whose employment contract requires the appointment; or
* A party to a voting agreement.
60
What is cumlative voting?
When more than one director is to be elected, corporations can allow shareholders to cumulate their votes and cast all those votes for only one (or more than one) of the candidates.
The right of a shareholder to cumulate votes means that the shareholder is entitled to multiply the number of votes she is entitled to cast by the number of directors for whom she is entitled to vote.
61
What are "staggered terms"?
Some corporations provide for the election of fewer than all of the directors, thereby staggering the terms of the directors, which provides for some continuity on the board from election to election.
62
What are "voting pools"?
A **voting pool** provides for the manner in which shareholders will vote their shares. Under such an agreement, shareholders retain ownership of their stock.
63
What limitations are placed on voting pools?
* Such an agreement is a contract that may be specifically enforced.
* It does not need to be filed with the corporation.
* The duration of the voting agreement cannot exceed 20 years.
* If the voting agreement states that it will last for more than 20 years or if it does not state its duration, then the agreement remains valid, but its duration will be limited to 20 years.
* A voting agreement may be renewed by agreement of all the shareholders to the voting agreement, for a period not exceeding 20 years from the date of the renewal.
64
What is a "voting trust"?
A **voting trust** constitutes a separate legal entity to which the shareholders’ stock is transferred.
Although the shareholders **retain** beneficial ownership of their shares, **legal ownership is transferred to the trustee**, who votes the shares and distributes the dividends in accordance with the terms of the trust. The trustee owes a fiduciary duty to the trust and the beneficial owners of the stock.
65
What limitations are placed on voting trusts?
* A voting trust must be in writing and filed with the corporation, and it is limited to 10 years.
* The voting trust may be extended for additional terms not exceeding 10 years each by written consent of all or some of the parties to the voting trust.
66
What may shareholder agree to by a management agreement?
Matters that shareholders may alter include:
* Elimination of the board of directors or restrictions on the discretion or powers of the board of directors;
* Authorization or making of distributions;
* Determination of who is a member of the board of directors, the manner of selection or removal of directors, and the terms of office of directors;
* The exercise or division of voting power by or between the shareholders and directors or by or among any of them, including director proxies;
* The terms and conditions of any agreement for the transfer or use of property, or provision of services, between the corporation and any shareholder, director, officer, or employee of the corporation;
* A transfer to one or more shareholders or other persons all or part of the authority to exercise corporate powers or to manage the business and affairs of the corporation;
* The dissolution of the corporation at the request of one or more shareholders, or upon the occurrence of a specified event or contingency; or
* The manner or means by which the exercise of corporate powers or the management of the business and affairs of the corporation is affected.
67
What is the proper form for a management agreement?
The agreement must be set forth either
* in the articles of incorporation or the corporate bylaws and approved by all persons who are shareholders at the time of the agreement, or
* in a written agreement that is signed by all persons who are shareholders at the time of the agreement and is made known to the corporation.
The agreement may be amended only by persons who are shareholders at the time of amendment.
68
What is the limits on the length of a managment agreement?
The agreement is valid for 20 years and may be renewed for another 20 years by agreement of all the shareholders at the date of renewal.
69
Can one rescinda purcashe of stock in a corporation operating with a managment agreement?
A person who purchases stock in a corporation with a management agreement without knowledge of the agreement can rescind the purchase.
70
What types of corporation can use a managment agreement?
A management agreement cannot be entered into for a corporation with shares that are listed on a national securities exchange or regularly traded in a market maintained by securities dealers or brokers, and the agreement ceases to be effective for a corporation when its shares are listed on such an exchange.
Thus, management agreements will generally only be found in closely held or close corporations.
71
What effect does a managment agreement have on liability?
If the agreement limits the discretion or powers of the board of directors, then the directors are relieved of liability for acts or omissions to the extent of the limitation, and the persons in whom such discretion or powers are vested are subject to liability.
The existence of the agreement is **not** a ground for imposing personal liability on shareholders for corporate acts or debts, even though the shareholders, by virtue of the agreement, fail to observe the corporate formalities.
72
Who possesses shareholder inspection rights?
Generally, not only a shareholder of record but also a beneficial owner of the shares enjoys inspection rights.
73
What records are subject to shareholder right to inspection?
Generally, a shareholder can inspect any corporate records, but the inspection may be limited to certain records, such as excerpts from the minutes of a board meeting or accounting records of the corporation.
74
What is the general rule regarding shareholder inspection rights?
A shareholder has a right to inspect and copy corporate records, books, papers, etc. upon five days’ written notice stating a proper purpose.
75
What is the time and place limits on shareholder inspection rights?
The inspection right is restricted to regular business hours at a reasonable location specified by the corporation, usually the corporation’s principal place of business.
Five days’ advance written notice is required.
76
What is the "proper purpose" limiation on shareholder inspection rights?
A shareholder’s inspection right is generally conditional on having a proper purpose.
A **proper purpose** is one that is good faith the value of one’s shares in a closely held corporation even though the shareholder does not plan to sell the shares. Improper purposes may include harassment of corporate officials or acquiring corporate secrets.
77
What is the exceptions to the proper purpose limitaiton on inspection?
A shareholder’s inspection right is not dependent on his purpose when inspecting:
* the corporation’s articles or bylaws,
* resolutions adopted by either the board or the corporation’s shareholders that increase or decrease the number of directors, the classification of directors, and the names and addresses of all members of the board,
* board resolutions regarding share classifications,
* shareholder meeting minutes from the past three years,
* communications sent from the corporation to shareholders over the past three years,
* the current list of the corporation’s directors and officers, including their addresses, or
* a copy of the corporation’s most recent annual registration.
78
How does a shareholder enforce his or her inspection rights?
Under the GBCC, a shareholder can obtain direct enforcement of his inspection right in an expedited court proceeding, with reimbursement for litigation costs.
79
What are distributions?
A distribution is the transfer of cash or other property from a corporation to one or more of its shareholders.
80
What is a dividend?
A dividend is normally a cash payment made to shareholders.
81
How does a corporation authorize a distribution?
The power to authorize a distribution rests with the board of directors.
Having authorized a distribution and set sufficient parameters, the board may delegate to a board committee or corporate officer the power to fix the amount and other terms of the distribution.
82
May a shareholder compel a distribution?
In general, a shareholder cannot compel the board of directors to authorize a distribution, because that decision is usually discretionary.
When a board acts in **bad faith and abuses its discretion** by refusing to declare a distribution, however, a court may order the board to authorize a distribution.
83
Generally, what are the limitations on distributions?
A corporation may not make a distribution if it is insolvent or if the distribution would cause the corporation to be insolvent.
84
How is insolvency determined regarding corporate distributions?
A corporation must pass two tests—an equity test and a balance-sheet test—to be deemed solvent and, as such, capable of making a distribution.
85
Regarding corporate distributions, what is the "equity test"?
Under the equity test, a corporation must be able to pay off its debts as they come due in the usual course of business.
86
Regarding corporate distributions, what is the "balance-sheet test"?
Under the balance-sheet test, a corporation’s total assets must exceed its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.
87
Regarding distributions, what is the time measure of corporate solvency?
A corporation’s solvency is measured on the date the dividend is authorized if payment occurs within 120 days after the date of authorization, or on the date payment is made if payment occurs more than 120 days after authorization.
In the case of a stock purchase, it is the earlier of the date the purchase price is paid or the date the shareholder ceases to be a shareholder.
88
When is a director liable for an unlawful distribution?
A director who votes for or assents to an unlawful distribution, in violation of the director’s duties of care and loyalty, is **personally liable** to the corporation for the amount of the distribution in excess of the lawful amount.
89
How are dividends distributed?
Dividends are distributed to persons who are shareholders on the record date set by the board of directors.
If the board does not set a record date, then the dividend is payable to persons who are shareholders on the date that the board authorized the dividend.
90
What are "outstanding stock"?
Stock authorized and issued by the corporation.
91
Are stock divends a distribution?
A corporation may issue its own stock to current shareholders without charge in lieu of making a distribution of cash or other property.
These transactions do not alter the corporation’s assets or liabilities, nor do they constitute a distribution.
92
What are the general limitation regarding the sell of personally owned stock?
Generally, a shareholder is free to sell his stock to anyone at any time or price.
Such freedom is subject to two significant restrictions—limitations imposed on shareholders of closely held corporations and penalties imposed on transactions that violate federal securities law.
93
What is the "conspicously noted' requirement for closely-held company corporate stock?
If the corporation issuing the shares imposes a restriction on transferability, then the stock certificate must contain either a full and conspicuous statement of the restriction or a statement that the corporation will provide a shareholder with information about the restriction upon request and without charge.
94
How are closely-held corporate stock restriction enforced?
A restriction in the transfer of a security, even if otherwise lawful, may be ineffective against a person without knowledge of the restriction.
Unless the security is certified and the restriction is conspicuously noted on the security certificate, the restriction is not enforceable against a person without knowledge of it.
95
What stock transfer restrictions are valid?
Restrictions on the transfer of stocks can take various forms, including:
* Transfers requiring consent from the corporation or its shareholders;
* Options to buy the stock held by the corporation or its shareholders;
* A right of first refusal (i.e., stock must be offered to the corporation or its shareholders before selling it to another person);
* The corporation requires or has the right to buy back the stock;
* A buy-sell agreement with either the corporation or its shareholders being obligated to buy the stock; or
* A prohibition on the transfer to designated persons or classes, as long as the prohibition is not manifestly unreasonable.
96
How may a shareholder challenge a limitation on transfering their stock?
Stock transfer restrictions have been subject to challenge as unreasonable restraints on alienation.
In Georgia, a restriction on the transfer of shares is authorized
* to maintain the corporation’s status when it is dependent on the number or identity of shareholders,
* to preserve exceptions under federal or state securities law, or
* for any other reasonable purpose.
Many of these restrictions are created through contractual arrangements, they may be subject to contractual defenses.
In addition, the restrictions may be narrowly interpreted and subject to equitable challenges such as abandonment, waiver, or estoppel.
97
Who is bound by restrictions on stock transfer?
Parties to an agreement that restricts stock transfers are bound by the terms of the contract.
Other parties are **not** subject to a transfer restriction **unless** they are aware of it.
If the restriction is noted on the face of the stock certificate, then the restriction is binding on the holder or a transferee.
98
What are the basic types of direct actions a shareholder may take against a corporation?
A shareholder may pursue two basic types of direct actions:
* an action to enforce shareholder rights or
* a non-shareholder action, the recovery from which is to the benefit of the indirect shareholder.
99
What is an action to enforce shareholder rights?
A shareholder may sue the corporation for breach of a fiduciary duty owed to the shareholder by a director or an officer.
Typical actions are based on the denial of or interference with a shareholder’s voting rights, the board’s failure to declare a dividend, or the board’s approval of or failure to approve a merger.
100
What are "non-shareholder actions"?
A shareholder may sue the corporation on grounds that do not arise from the shareholder’s status as a shareholder.
101
What is a derivative action?
In a derivative action, a shareholder is suing on behalf of the corporation for a harm suffered by the corporation.
Although the shareholder also may have suffered harm, recovery generally goes to the corporation.
102
Who may bring a derivative action lawsuit?
Generally, a shareholder may only commence a derivative action if he:
* Was a shareholder at the time of the act or omission; or
* Became a shareholder by a transfer by operation of law from a shareholder who was a shareholder at the time of the act or omission.
103
Who has standing in a derivative lawsuit?
A shareholder must fairly and adequately represent the interests of the corporation, in enforcing the rights of the corporation through a derivative action.
To fairly and adequately represent the interests of the corporation, the shareholder must be a shareholder at the commencement of the suit and must continue to be a shareholder during the litigation.
104
What is the "demand upon board" requirment in a derivative lawsuit?
The plaintiff in a derivative action must make a written demand upon the corporation (most frequently the board of directors) to take action.
The shareholder must then wait 90 days from the date of the demand before filing a derivative action.
If the shareholder has been notified that the demand has been rejected before the end of the 90-day period, then the shareholder may file suit before the expiration of the 90-day period.
105
What is the "fultility exception"?
In some states, a demand upon the board is not required if the demand would be futile.
Georgia, however, does not recognize a futility exception; in all derivative actions, the shareholder must first make a written demand on the corporation.
106
What is the irreparable-injury excuse in a derivative lawsuit?
The plaintiff may be excused from waiting the 90-day period for the board to respond to the demand if the delay would result in irreparable injury to the corporation.
107
What effect does the board rejecting the shareholder's demand have on a derivative lawsuit?
If the board specifically rejects the demand, then the rejection is tested against the **business-judgment rule**.
108
What is the "business judgment rule"?
The court may dismiss a derivative proceeding, on motion by the corporation, if it concludes that the corporation has made a determination in good faith after conducting a reasonable investigation that maintenance of the derivative suit is not in the best interests of the corporation.
The corporation has the burden of proving the independence and good faith of those who made the determination and the reasonableness of the investigation.
Such a determination must have been made by:
* a majority vote of disinterested directors present at a board meeting if the independent directors constitute a quorum,
* a majority vote of a committee consisting of two or more independent directors, or
* a panel of one or more independent persons appointed by the court upon motion by the corporation.
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What is "pierce the corporate veil"?
If a plaintiff can “pierce the corporate veil,” then a corporation’s existence is ignored, and the shareholders of the corporation are held personally liable.
Although courts are reluctant to hold a director or active shareholder liable for actions that are legally the responsibility of the corporation (even if the corporation has a single shareholder), they will sometimes do so if the corporation was markedly noncompliant or if holding only the corporation liable would be singularly unfair to the plaintiff.
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What is the general standard to determine whether to pierce the corporate veil?
Courts look at the **totality of circumstances** in deciding whether to pierce the corporate veil.
Courts generally look to whether the corporation is being used as a façade for a dominant shareholder’s personal dealings (i.e., whether the corporation is an alter ego of the shareholder).
Additionally, courts look to whether there is unity of interest and ownership between the entity and the members, such that the corporation in fact did not have an existence independent of the members.
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What factors do Courts take into account to determine whether to pierce the corporate veil?
* Undercapitalization of the corporation at the time of its formation;
* Disregard of corporate formalities;
* Use of corporate assets as a shareholder’s own assets;
* Self-dealing with the corporation;
* Siphoning of corporate funds or stripping of corporate assets;
* Use of the corporate form to avoid existing statutory requirements or other legal obligations;
* A shareholder’s impermissible control or domination over the corporation; and
* Wrongful, misleading, or fraudulent dealings with a corporate creditor.
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How are "controlling shareholders"?
When one shareholder—or a group of shareholders acting in concert—holds a high enough percentage of ownership in a company to enact changes at the highest level, the shareholder or group is a controlling shareholder.
Anyone controlling 50% of a corporation’s shares, plus one, is automatically a controlling shareholder.
A much smaller interest, whether owned individually or by a group in combination, can be controlling if the remaining shares are widely dispersed (as in a large, publicly traded corporation) and not actively voted.
Additionally, a corporation that requires a supermajority of shares to vote in favor of a motion can effectively grant control to a minority shareholder or block of shareholders that owns just more than one-third of the shares of the corporation. Thus, in some cases, a shareholder can essentially maintain control of a corporation with only 33.4% of the outstanding shares.
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What are "controlling shareholder's" fiduciary obligations?
A fiduciary duty to the minority shareholders may arise if the controlling shareholder is
* selling that interest to an outsider,
* seeking to eliminate other shareholders from the corporation, or
* receiving a distribution denied to the other shareholders.
A controlling shareholder has a duty to disclose to the minority shareholder any information that it knew or should have known if it is information that a reasonable person would consider important in deciding how to vote on a transaction.
A controlling shareholder breaches its fiduciary duty to the minority shareholder if nondisclosure causes a loss to the minority shareholders.
A loss includes being deprived of a state remedy that would otherwise have been available.
Furthermore, when a majority shareholder purchases the interest of the minority, it has a fiduciary duty of fair dealing.
The controlling shareholder bears the burden of demonstrating that the process it employed was fair and the price it selected was fair.
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