Corporations Flashcards
What does it take to form a corporation?
- People
- Paper
- Act
What’s included in the “people” requirement for corporation formation?
People are AKA incorporators.
Must have one or more. Can be entity (XYZ Inc.) or a person
An incorporator executes the articles and delivers them to the Secretary of State.
What is included in the “paper” requirement for corporation formation (Articles of Incorporation)?
Articles are a contract between:
- corporation and shareholders
- corporation and the state
Information in articles taht are required:
- Name and addresses (corporate name, including magic words: corporation, company, incorporated, limited)
- Name and address of each incorporator
- Name and dadress of each initial director
- Name of registered agent and address of registered office (registered agent is the company’s legal rep, so can receive service of process for corporation).
- Statement of purpose
- Stock information re: capital structure (authorized stock, number of shares per class, and info on voting rights and preferences of each class)
What is the duration of a corporation if there is no statement re: duration in the articles of incorporation?
It was perpetual existence.
What is the required statement of purpose within articles of incorporation?
In some states, general purpose is presumed and the articles need not say anything about corporation purpose.
They can indicate that the purpose is to “engage in all lawful activity, after first obtaining necessary state agency approval.”
What is the ultra vires rule re: a corporation’s purpose?
If there is a specific statement of purpose, a failure to adhere to that purpose (or going beyond the scope of the articles.
Impact:
At common law, voided beyond the corporation’s explicitly stated capacity.
Today: ultra vires contracts are valid. Shareholders can seek an injunction. Responsible managers are liable to the stock corporation for losses.
What is authorized stock?
Max number of shares the corporation can sell
What is issued stock?
Number of shares the corporation actually sells
What is outstanding stock?
Shares that have been issued and not reacquired.
What information about capital structure do the articles of incorporation need to include?
- Authorized stock (maximum number of shares the corp cal sell)
- Number of shares per class
- Info on voting rights/preferences of each class
What is included within the “act” requirement of forming a corporation?
Incorporators must notarize the articles delivered to the Secretary of State and pay the required fees.
If the Sec of State’s office accepts the articles for filing, that is conclusive proof of valid formation. At that point, there is de jure corporation.
Next, board of directors holds an organizational meeting, where it selects officers/adopts bylaws, etc.
Why does it matter that osmeone formed a corporation?
- Internal affairs are governed by the law of the state of organization (internal affairs rule)
- A corporation is a separate legal person with entity status. It can be sued, be a partner, make charitable contributions. It pays income tax on its profits and shareholders are taxed on its distributions (unless S corp, which doesn’t pay income tax at corporate level).
What is an S Corporation?
No more than 100 shareholders, all of whom are human and US citizens/residents. THis is a class of stock. Isn’t publicly traded.
If you have an S corp, will not be required to pay income tax at the corporate level (but shareholders will still be taxed on distributions)
Who holds liability within a corporation?
Directors/officers/shareholders (owners) are not liable for what entity does.
A corporation is “limited liability,” which means that shareholders are generally liable only for the price of their stock. Generally, the corporation itself is liable for what the corporation does.
Who would assert de facto corporation/corporation by estoppel?
proprietors failed to form a de jure corporation, so they will be personally liable for what the business does (because it’s just a partnership). Under these doctrines, the business is treated as a corporation, so shareholders are not liable for what the business did. Anyone asserting either doctrine must be unaware of failure to form de jure corporation.
What are the requirements for a De Facto Corporation (DCF)?
Abolished in most states
- Relevant incorporation statute (always met)
- Parties made good faith, colorable effort to comply with statute
- Some exercises of corporate privilege (acting like they have corporation)
If these are met, business is treated as a corp for all purposes, except in actions by the state (b/c that would be quo warranto)
What is a corporation by estoppel?
Abolished in most states One who treats a business as a corp may be estopped from deying that it is a corp.
It prevents an improperly-formed corporation from avoiding liability by saying it was improperly formed.
Applies only in contract and not in tort.
What are bylaws?
Not a condition precedent to forming a corp, but usually exist for internal governance.
Aren’t filed with the state, they are internal.
The board adopts them at the organizational meeting.
Shareholders can amend or repeal the bylaws of the corp, but in many states the board also can.
Who wins, in a conflict between bylaws and articles of incorporation?
Articles, because they are a contract with the state and are therefore more important.
What is a pre-incorporation contract?
When a promoter, acting on behalf of a corp not yet formed, enteres into a contract on behalf of that contract.
When will a promoter be liable on a pre-incorporation contract?
Unless the K says otherwise, promoter is liable on pre-incorporation Ks until there is a novation.
A novation is an agreement of the promoter, corp, and other K party that corporation replaces the promoter under the K.
Note: adoption makes the corporation ALSO liable, but does not relieve promoter, so both will be liable absent novation.
What is a foreign corporation? When must they pay fees?
A foreign corporation transacting business in the state must qualify and pay prescribed fees.
Transacting business - regular course of intrastate (not interstate) business activity.
NOT occasional/sporadic activity. Doesn’t include simply owning property.
What happens if a foreign corporation transacts business in a state without first qualifying?
Civil fine AND
Corporation cannot sue in the state (but it can be sued).
They can sue only once corporation qualifies and pays back fees and fines.
How does a foreign corporation qualify in order to do business transactions in a state?
- Gives the required Articles of Incorporation information and proves good standing in its home state.
- Registered agent in this state
- Must pay fees here too
What is a stock issuance?
When a corporation sells its own stock. It is a way the corp can raise capital.
Note: it won’t count if just an individual is issuing stock
What is a subscription?
A written offer to buy stock from the corporation.
Pre-incorporation subscriptions are irrevocable for 6 months, unless otherwise stated or all subscribers agree to let you revoke.
Post-incorporation subscriptions are revocable until accepted by corporation (board acceptance).
What must the corporation receive when it issues stock?
Consideration. (What must the corporation receive when it issues stock?)
Step 1: Form of consideration (definitely OK: money, tangible/intangible property, and services already performed by corporation)
- split authority whether these work or are “treated as unpaid stock/water” - promissory notes, future services
Step 2: Amount of consideration
- Par (“minimum issuance price”
- No par (no minimum, board sets)
- Treasury stock (stock the company issued and then acquired, board can set whatever price it wants)
Who sets the value of the property or services, for purposes of issuance?
The board. The board’s valuation is conclusive if it acted in good faith.
Who is liable for an issuance involving “watered stock”?
Watered stock means that it was sold below par price.
Directors who sold are liable if they knowingly authorized the issuance (implied if they sold less than par)
Guy who bought is liable - charged with notice of par value.
If X transfers to third party, is only liable if knew about the water.
What are the preemptive rights in a stock issuance?
The rights of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for money (note: NOT for property).
Split as to whether “new issuance” includes the issuance of treasury stock.
If articles are silent, split as to whether shareholder gets preemptive rights.
What are statutory requirements re: number of directors?
Adult natural person, 1 or more.
WHat are statutory requirements w/r/t directors?
Initial directors usually named in articles.
Thereafter, shareholders elect directors at annual meeting.
Entire board is elected each year unless there is a “staggered board.” A staggered board is divided into halfs or thirds, with half or third elected each year. Staggered board is usually set in the articles.
Can shareholders remove directors before their terms expire?
Yes, generally requires majority of shares entitled to vote.
Shareholders can remove with or without cause.
Exception: if there is a staggered board, shareholders can only remove a director with cause.
Suppose there is a vacancy on the board. Who selects the interim director?
Board or shareholders.
But if the shareholders create vacancy by removing a director, the shareholders generally must select the replacement.
What are the two ways in which board of directors can act?
Either by unanimous agreement in writing or at a meeting (which must satisfy quorum and voting requirements).
If directors agree to a corporate act through the individual conversations without meeting or unanimous writing agreement, that act is void unless ratified by a valid act.
Are individual directs the agents of a corporation?
No. Individual directors have no authority to speak for or to bind the corporation.
Officers, on the other hand, are agents of the coprorations.
What are the requirements for notice re: a corporate board meeting?
Regular meeting: no notice required.
Special meeting: notice requird, and must state time and place. Failure to give required notice voids whatever happened at the meeting, unless the directors not notified waive the notice defect (in writing or attending the meeting without objecting).
Can directors set proxies or enter voting agreements?
No. Those are VOID, because directors owe the corporation a non-delegable fiduciary duty.
What is the quorum required for a meeting?
For any meeting, need quorum.
Unless bylaws say otherwise, quorum is a majority of all directors. If a quorum is present, passing a resolution (which is how a board takes action), requires only majority vote.
Quorum can be lost (broken) if people leave. Once quorum is no longer present, Board cannot take act at that meeting.
What is the general role of a corporate director?
Generally, they manage the business of a corporation by setting policy, supervising officers, delcaring distributions, determining when stock will be issued, recommending fundamental corporate changes to shareholders, etc.
The board can delegate to a committee of one or more directors, but a committee cannot declare dividends, set director compensation, or fill a board vacancy. The committee can recommend those things to the full board for its action.
