Corporations

Question 1

Penalties for Florida Corporations that Fail to File an Annual Report

Answer 1

A Florida corporation that fails to file an annual report is—

1. barred from bringing or defending any action in the Florida courts until the report is filed; and
2. is also subject to involuntary dissolution. 607.1622

Question 2

Penalties for Foriegn Corporations Transacting Business Without Authority

Answer 2

1. Cannot Bring Suit: A foreign corporation transacting business without authority cannot bring any action in any court in Florida, until the corporation obtains authority. However, the corporation is not barred from defending any action in Florida. 607.1502(1), (5)
2. Contracts Not Impaired: The failure of a foreign corporation to obtain authority to transact business in Florida does not impair the validity of any contract or corporate act.

Question 3

Articles of Incorporation:

Statutory Powers (607.0833)

Answer 3

To lend money to and use its credit to assist its officers and employees when such may reasonably be expected to benefit the corporation.

• Not-for-profits are prohibited from making loans to insiders.

Question 4

Articles of Incorporation:

Mandatory Provisions (607.0202)

Answer 4

The articles must be in writing and contain the following elements:

1. The name of the corporation, which must be distinguishable from all other entities authorized to do business in Florida and must contain the word “corporation,” “company,” or “incorporated,” or the abbreviation “Corp.”, “Co.,” or “Inc.,” or words or abbreviations of like import which clearly indicate it is a corporation.
   
   • In Florida, the word “Limited” implies partnership, not a corporation. 607.0401
2. If shareholders are to be given preemptive rights to acquire shares issued subsequently by the corporation, a provision setting for the extent of such rights must be included.
   
   • In the absence of any provision in the articles, shareholders have no preemptive rights. 607.0630(1)

Question 5

Liquidation Preference

Answer 5

On liquidation, the preferred shareholders are usually accorded the right to receive a stated value for their shares, plus any accumulated but unpaid dividends, before common shareholders receive anything on their shares.

Question 6

Subscription Agreements

Answer 6

• A subscription agreement is a contract by which the subscriber agrees to purchase a certain number of shares of stock of the corporation at the subscription price specified in the agreement.
• The Florida statue provides that a written pre-incorporation agreement is irrevocable for six months unless it provides otherwise, or unless all of the subscribers consent to revocation.

Question 7

Restrictions on Transfer of Stock

Answer 7

• Restrictions on sale must be reasonable.
• It is quite common in close corporations to have buy/sell agreements and agreements giving a right of first refusal on the sale of stock.
• Generally, restrictions on the sale of stock will be enforced as long as they are reasonable.

Question 8

Annual Meeting

Answer 8

• An annual meeting of the shareholders is held (at a time stated in, or fixed in accordance with, the bylaws) for the election of directors and such other business as may be necessary or appropriate.
• If the annual meeting is not held within any 13 month period, any shareholder may apply to the court for an order requiring the meeting to be held. 607.0703

Question 9

Shareholders:

Proxies

Answer 9

• Every shareholder entitled to vote, or express consent or dissent, may authorize another person to act for him by written proxy.
• A shareholder (or the shareholder’s properly appointed agent) may appoint a proxy by signing an appointment form or by transmitting a telegram or other electronic communication.
  
  • Under the Florida statute, proxies expire after 11 month unless otherwise expressly provided.
  • Proxies are revocable at the pleasure of the shareholder unless the proxy provides it is irrevocable and the proxy holder has an interest in the shares, such as a pledgee, purchaser, or employee.
    
    • A proxy may be revoked, even if otherwise irrevocable, by a bona fide purchaser of the shares without notice of the proxy. 607.07022.
  • Death of the shareholder does not revoke the proxy.

Question 10

Cumulative Voting

Answer 10

The articles may provide for cumulative voting, which is intended to aid minority shareholders in obtaining some representation on the board of directors.

• Example: A owns 100 voting shares, and 3 directors are to be elected. A is entitled to 300 votes (100 shares x 3 directors) and he may cast all 300 votes for the same candidate or spread them among any number of candidates.

Question 11

Legality of Dividend Payment

Answer 11

The Florida statute sets forth two standards (solvency tests) for payment of dividends, both of which must be met in every instance (607.06401):

1. Equity/Cash Flow Test - A dividend is permissible only if—after giving it effect—the corporation will be able to pay its debts as they become due in the usual course of business.
2. Bankruptcy/Balance Sheet Test - Dividends are limited to the amount by which total assets of the corporation exceed the sum of total liabilities and the liquidation preferences of preferred shares.

Question 12

Shareholders: Records Available for Inspection

Answer 12

Assuming for proper purpose, any shareholder may inspect and copy the following records of the corporation:

1. minutes of any meeting of the board, and records of any action of a committee of the board while acting in place of the board;
2. accounting records of the corporation;
3. the record of shareholders; and
4. any other books and records.

Question 13

Shareholders:

Proper Purposes for Inspection of Records

Answer 13

Any shareholder may inspect and copy certain records of the corporation if—

1. he gives the corporation written notice of his demand at least five business days before the date on which he wishes to inspect and copy;
2. his demand is made in good faith and for a proper purpose;
3. he describes with reasonable particularity his purpose and the records he desires to inspect; and
4. the records are directly connected with his purpose.

Question 14

Appraisal Rights Availability

Answer 14

Appraisal rights are not available for holders of any class or series of shares that—

1. are traded on a national securities exchange (on the theory that the shareholder is adequately protected by his ability to sell his stock at the market prices); or
2. has at least 2,000 shareholders and the outstanding shares of the class or series have a market value of at least $10 million (excluding the value of shares held by subsidiaries, senior executives, directors, and beneficial shareholders owning more than 10% of such shares).

Question 15

Dismissal of Derivative Suit by Corporation

Answer 15

On motion by the corporation, the court may dismiss a derivative proceeding if the court finds that one of the following groups has made a good faith determination, after conducting a reasonable investigation, that maintenance of the derivative suit is not in the best interest of the corporation:

1. majority vote of—
   
   • independent directors present, if the independent directors constitute a quorum;
   • a committee consisting of two or more independent directors appointed by majority vote of the independent directors;
2. a panel of one or more individual persons appointed by the court upon motion of the corporation. 607.07401(3)

Question 16

Proper Time and Place of Director Meetings

Answer 16

• Director meetings may be held within or outside of the state.
• Special meetings may be called by the chairman of the board or the president unless otherwise provided in the articles or bylaws. 607.0820

Question 17

Validity of Phone Conference Director Meetings

Answer 17

The Florida statute expressly provides that directors may participate in a meeting by means of conference telephone (or similar communications equipment) and that such participation constitutes personal presence (quorum) at the meeting. 607.0820(4).

Question 18

Notice of Director Meetings

Answer 18

• Director meetings need not be formal and no notice of regular meetings is required.
• Unless otherwise provided in the bylaws, written notice of special meetings must be given at least two days before the meeting.
  
  • Shareholder meetings are always 10 days, regardless.
• The notice may be delivered by mail or personally and need not specify the purpose of the meeting. 607.0141, .0822

Question 19

Quorum for Director Meetings

Answer 19

Unless the articles or bylaws require a greater number, a majority of the total number of directors authorized (counting vacancies as absent) is necessary to constitute a quorum. 607.0824(1).

• A director who participated by conference telephone is deemed present.
• The articles of incorporation can establish a smaller quorum size, but it must be at least 1/3 of the authorized directors.
• Once a quorum is established, it does not cease to exist if people leave the meeting.

Question 20

Compensation of Directors

Answer 20

Unless the articles of incorporation or bylaws provide otherwise, the board of directors may fix the compensation of directors.

Question 21

Liquidation and Dissolution:

Involuntarily by Judicial Order

Answer 21

• A Florida corporation may be liquidated and dissolved involuntarily under judicial supervision.
• The courts have full power to liquidate the assets and business of a corporation in an action by a shareholder when there is either—
  
  • a deadlock in which the—
    
    1. directors are deadlocked in the management of corporate affairs,
    2. shareholders are unable to breach the deadlock, and
    3. corporation is suffering threatened with irreparable injury; or
  • the shareholders—
    
    1. are deadlocked in voting power and
    2. have failed to elect successors to directors whose terms have expired, etc.

Question 22

Not-For-Profit Corporations

Answer 22

The provisions to be set fort in the articles of incorporation are substantially the same as those for corporations for profit except the articles must set forth the purpose or purposes for which the corporation is organized. 617.0202

Question 23

Not-For-Profit Corporations:

Directors

Answer 23

A board of directors must consist of three or more individuals, with the number specified in, or fixed in accordance with, the articles of incorporation or the bylaws.

Question 24

Not-For-Profit Corporations:

Loans to Directors or Officers

Answer 24

Loans may not be made by a not for profit corporation to its directors or officers, or to any other entity in which one or more of its directors or officers is a director or officer or holds substantial interest, except loans “between certain corporations exempt from federal income taxation.” (i.e., other nonprofits that are serving as board members) 617. 0833

Question 25

Not-For-Profit Corporations:

Dissolution and Distribution of Assets

Answer 25

• A board of directors may dissolve the not for profit corporation by a majority vote.
• If the corporation has members entitled to vote on dissolution, a majority vote of those members is also required.
• There must be a plan of distribution of assets.

Question 26

Service of Process for Domestic and Qualified Foreign Corporations Officers and Business Agents

Answer 26

• Process may be served on a corporation by personally serving any one of the following officers or agents.
• Service must be made on a person in (1) below, if possible, and only in their absence can service be had on a person in (2) and so on down the list:
  
  1. President, vice president, or other head of the corporation
  2. Cashier, treasurer, secretary, or general manager
  3. Any director
  4. Any officer or business agent resident in Florida. 48.081(1)
  • If a foreign corporation has none of the above persons in Florida, process may be served of any agent transacting business for it within the state. 48. 081(2).

Question 27

Debenture

Answer 27

An unsecured loan certificate issued by a company, backed by general credit rather than by specified assets.

Question 28

Articles of Incorporation:

Information Requirements

Answer 28

A corporation’s articles of incorporation must include—

1. the name of the corporation;
2. the corporation’s street and mailing address;
3. the number of shares the corporation is authorized to issue, or authorized shares;
   
   • If more than one class or series of shares is authorized, a description for each class and series regarding the
     
     1. preferences,
     2. voting powers,
     3. qualifications, and
     4. special rights or privileges.
   • The articles of incorporation need not state the—
     
     • number and types of shares actually issued or
     • consideration received for the shares.
4. any preemptive rights granted to shareholders (i.e. rights to buy additional shares to maintain their percentage of ownership in the corporation);
5. the street address of the corporation’s initial registered office;
6. the name of its initial registered agent; and
7. the name and address of each incorporator.

Question 29

Shareholders:

Means of Asserting Influence

Answer 29

• The board of directors may issue any number of authorized shares to shareholders, who hold ownership rights in the corporation.
• While shareholders have no direct voice in the management of the corporation, they can influence corporate management by voting—

1. for the election or removal of directors;
2. for major corporate changes entrusted to them by law (mergers, sales of all or substantially all of the corporation’s assets) or under the articles of incorporation;
3. on a limited basis, matters of corporate reform and policy for consideration; and
4. on the elimination or restriction of director discretion or power pursuant to a shareholder agreement.

Question 30

Business Judgment Rule (BJR)

Answer 30

The business judgment rule is a rebuttable presumption that directors and officers are acting with reasonable diligence and in good faith.

• It does not shield officers who act—
  
  1. fraudulently, illegally, or in bad faith;
  2. without a rational business purpose; or
  3. without performing due diligence.

Question 31

Ratification of Extant Contracts

Answer 31

Pursuant to Florida law, a corporation can become a party to an already extant contract upon—

1. ratification of the contract and
2. creation of a novation—i.e. a separate agreement which discharges an original contracting party from liability.

Question 32

Articles of Incorporation:

Waivable Powers

Answer 32

Unless their articles of incorporation provide otherwise, all corporations may—

1. sue and be sued;
2. lend money to directors;
3. make charitable donations;
4. purchase real estate; and
5. purchase and sell any interest or other obligations in any other entity.

Question 33

Shareholders:

Reverse Piercing

Answer 33

In Florida, a plaintiff can seek a “reverse piercing” of the corporate veil when the corporation has been formed by shareholders for the purpose of evading a contractual obligation or statutory laws.

Question 34

Florida “Blue Sky” Laws

Answer 34

• The SEC allows each state to have its own securities law regimes known as “Blue Sky” laws—preempted by federal law in certain areas, as federal courts have held.
• Under Florida Blue Sky laws, the Florida attorney general may investigate and enforce anti-fraud provisions of the statute.

Question 35

Liquidation and Dissolution:

Involuntarily by the Department of State

Answer 35

The Florida Department of State may dissolve a corporation if the corporation—

1. doesn’t file its annual report or pay its annual reporting fee;
2. doesn’t have a registered agent for at least 30 days;
3. doesn’t notify the Department of State within 30 days that its registered agent or office has been changed or discontinued;
4. doesn’t answer truthfully and fully to an interrogatory from the Department of State; or
5. reaches the expiration of its duration as stated in its articles of incorporation.

Question 36

Parent/Subsidiary Liability

Answer 36

Corporations often form subsidiaries to isolate business risks and are entitled to the benefits of limited liability insofar as claims against such subsidiaries unless it can be shown that the parent company dominates the subsidiary to the point that the two companies can be taken to act as a single entity.

Question 37

Articles of Incorporation:

Amount of Authorized Shares

Answer 37

A corporation’s articles of incorporation state the corporation’s number of authorized shares, so in order to increase that number, the articles of incorporation need to be amended—which must be approved by the shareholders.

Question 38

Shareholders:

Appraisal Rights

Answer 38

A shareholder that objects to a fundamental corporate change (e.g. merger, sale of all or substantially all of the corporate assets, etc.) is entitled to appraisal rights—i.e. payment from the corporation of the fair market value of the shareholder’s shares—so long as the shareholder—

1. files a written objection to the corporate change prior to the shareholder meeting held to approve the change, and
2. actually votes against the change.