Corporations Flashcards
record date
o Used to determine which shareholders are eligible to vote
o The directors must fix a record date.
o Must be no fewer than 10 days before the meeting and no more than 70 days before the meeting
o ONLY shareholders who actually own shares on the record date are entitled to vote.
What changes require approval of both shareholders and BoD?
Fundamental Changes:
- merger and consolidation
- dissolution (voluntary)
Reqs for derivative suit
- standing: must maintain contemporaneous stock ownership (starting at the time of the harm)
- Demand: first demand that the board of directors bring the lawsuit in the corporation’s name before the shareholder can bring the suit UNLESS DEMAND FUTILITY (directors named as ∆s)
dissenter’s rights
If a shareholder does not wish to participate in a duly authorized merger, asset sale, share exchange, or amendment of the articles, the shareholder is entitled to dissenters’ or appraisal rights.
Entitled to have their shares purchased from them by the corporation at a fair value determined by the court.
Procedural Requirements: To invoke dissenters’ rights..
(a) The shareholder must send written notice to the corporation prior to the vote of her intent to dissent;
(b) At the meeting, the shareholder must abstain or vote no (dissent) at the meeting; and
(c) The shareholder must make prompt written demand for fair market value after the action has been approved.
Fair Market Value Determination: If the shareholder and the corporation disagree as to fair market value, a court can appoint an expert appraiser to issue a binding appraisal of the value.
A self-interested transaction may be upheld if it is disclosed and ratified by:
- A majority of disinterested directors; or
2. A majority of disinterested shareholders.
process for fundamental changes
• The board must adopt a resolution proposing the change;
• written notice must be sent to the shareholders of the special meeting; and
• A majority of the shareholders casting a vote
must vote in favor of the fundamental change.
LLC characteristics
o The LLC combines the limited liability of corporations with the tax treatment of a partnership.
o Generally no limitations on the number of shareholders, no residency requirements, and no natural person requirements (more flexible than an S Corp).
o An LLC files articles of organization and an operating agreement with the state.
o The owners are called members, rather
than shareholders.
o An LLC is presumed to be managed by ALL of its members.
Factors in deciding whether to pierce the veil
- alter ego: the investor or shareholder has failed to observe any corporate formalities between the person and the corporation - treated the company just like itself;
- undercapitalization: failure to maintain funds sufficient to cover foreseeable liabilities
- fraud: the parties engaged in fraud or fraud-like behavior.
Who is liable for pre-incorporation agreements?
not corporation, generally.
Promotors generally liable
exception: novation
S Corporation
- An S Corp is really just a corporation for state corporate law purposes, but it gets special treatment for tax purposes.
- Only taxed once, like a partnership
- NOT taxed at entity level - allows “pass-through” taxation
- S Corp is limited in the number of shareholders they may have.
Who is a Controlling Shareholder?
o Easy case - those who own 50% plus one, or more
o Less than 50% plus one - look to the nature of the ownership of the company
de facto corporation
Rule-Corporation will still be treated as a corporation, w/ limited liability if the organizers:
- Made a good faith effort to comply with the incorporation process; and
- have no actual knowledge of a defect in the corporate status
To be legally effective, a proxy must be:
- In writing;
- Signed by the shareholder as of the record date
- Sent to the secretary of the corporation;
- State that it authorizes another to vote the shareholder’s shares; and
- Cannot be valid for more than 11 months, unless otherwise specified.
Indemnification
The practice of corporations paying for the costs of a director’s or officer’s defense in litigation, usually by purchasing insurance.
Required or Mandatory Indemnification
The corporation is ALWAYS required to pay the costs of defense if the director or officer successfully defends the case.
Prohibited Indemnification
The corporation CANNOT indemnify a director or officer who is liable for receiving an improper benefit from the corporation or otherwise loses a lawsuit.
Permissive Indemnification
The corporation may, but is NOT required, to indemnify a director or officer for the costs of a suit if the director or officer:
(a) Acted in good faith with no intent to harm the corporation; or
(b) Had no reasonable cause to believe the conduct was illegal.
removal/replacement of directors
o Shareholders may remove directors with or without cause.
o There is an important exception: Staggered Board:
• May only be removed for cause, only if the articles provide; and
• Different classes of shareholders may elect different directors—only directors elected by a particular class may be removed by that class.
Types of Shares
- authorized shares (total # allowed)
- issued shares (# that have actually been sold)
- outstanding shares (still remain in possession of shareholders)
- treasury shares (Stock previously issued to shareholders, but then reacquired by the corporation.)
outstanding + treasury = issued
timing of incorporation
o Moment of incorporation is when limited liability begins.
o Rule: When the Secretary of State accepts your fee and files the articles, the corporate existence begins.
who may appoint a director in the event of a vacancy or the size of the board has increased?
shareholders at special meeting or BoD
what must the articles of incorporation include?
- The name of the corporation, which must include: “Corporation,” “Company,” “Incorporated,” “Limited”, or an abbreviation of these words;
- The agent of the corporation (name and address within the state of incorporation);
- The names and addresses of the incorporators;
- The duration of the corporation (most are
perpetual) ; - The purpose of the corporation (usually stated as “to engage in any lawful activity.”); and
- Authorized shares
general rule for duty of loyalty
May not receive an unfair benefit to the detriment of the corporation without effective disclosure and ratification
meetings (special and annual) notice reqs
Shareholders must be given notice of either type of meeting (annual or special) no fewer than 10 days, but no more than 60 days, before the meeting.
Must include the time, date, and location of the meeting.
Special meetings must include the purpose of the meeting
Insufficient notice can allow a shareholder to challenge actions taken at the meeting.
Waiver of notice: notice can be waived by
attending the meeting
Board CANNOT declare dividends under what circumstances?
- If the corporation is insolvent (owes more than it has); or
- If, by issuing the dividend, the corporation would become insolvent.
watered stock
The corporation sets a par value amount and sells the stock for less than the stated amount.
shareholders who bought the below par value stock (watered stock) are liable to the creditors of the corporation.
Differences of a close corp (compared to normal corp)
o Shareholders are often also directors and officers.
o Typically NOT publicly traded
o Relaxation of rigid rules for corporations - hard to get out due to a lack of market to sell the
shares.
o Can form voting agreements
