Corporations Flashcards
Definition: Corporation
A corporation is a separate legal entity that comes into existence by charter from the state.
What are the advantages of forming a corporation (4 things)
- Shareholders have limited liability for corporate debts and obligations.
- Shareholders may freely transfer their ownership rights to others.
- A corporation may have perpetual life.
- A corporation has a regular form of management decision-making established by statute.
What is the difference between a corporation and a partnership? (3 things)
- Forming a corporation is more elaborate and expensive.
- Federal tax liability may occur BOTH when a corporate realizes profit AND when dividends are distributed to shareholders.
- Formalities of management may be more restrictive, except in a close corporation.
Corporations may not engage in in the following combinations of business (2 things):
- Raising cattle & owning land therefor, and the business of preparing meat for market (slaughtering, etc.); or
- The petroleum oil producing business and the oil pipeline business.
A corporation {may/may not} contract, buy and sell property, and sue and be sued in contract, tort, or for statutory violations.
MAY
A corporation {may/may not} lend money to or otherwise assist its employees, officers, and directors as necessary or appropriate.
MAY
How is a corporation managed?
Unless the certificate of formation, bylaws, or a shareholder agreement provides otherwise, the business and affairs of a corporation are managed by the board of directors, who are elected by the shareholders.
The directors usually appoint _____ to operate the corporation on a day-to-day basis.
Officers
What documents govern a corporation?
Certificate of formation & Bylaws.
Organizers of the corporation must prepare a certificate of formation, which describes the purposes and structure of the corporation.
Bylaws contain a specific statement of management procedures and may be amended by the board unless the power to amend is reserved exclusively to the shareholders in the certificate or unless a bylaw specifically prohibits amendment by the board.
What is a “B Corporation”?
Benefit Corporation.
A benefit corporation intends to benefit the public and the environment, in addition to its shareholders.
What makes a B Corporation different from a C corporation? (3 things)
- A benefit corporation’s certificate of formation must state that it is a benefit corporation and include at least one of the public benefits to be promoted.
- The name must also include the words “public benefit corporation,” or the abbreviation P.B.C. or PBC.
- B corporations are required to prepare statements biennially, which are sent to the shareholders, regarding the progress of meeting the public benefits stated in its certificate of formation.
Definition: De jure corporation
A corporation formed in accordance with all applicable laws.
Steps for formation of a corporation (4 things):
- Organizer: may be person of 18+ years, corporation, partnership, association, trust, or estate.
- Put in mandatory & optional provisions
- Organizer must file the certificate with the secretary of state.
- Upon receipt of an acknowledgement of receipt from the state, corporation’s existence begins.
What MUST a certificate of formation include? (6 things)
- Name of the corporation;
- Number, names, and addresses of initial directors;
- Purpose for which the corporation is to be formed (i.e. “any lawful purpose.”);
- The duration of the corporation (if it is to be anything other than perpetual);
- Capital stock structure and shareholders’ rights
- Names and addresses of the corporate agent and each organizer.
What is the de facto corporation doctrine?
A defense to personal liability of owners of a business who thought they were operating in the corporate form.
Applied when there has been a good faith attempt to comply with the statutory formation requirements and business has been conducted in the corporation’s name.
NOT CLEAR WHETHER TEXAS WILL APPLY THIS DOCTRINE
What is a corporation by estoppel?
Corporation may be held to be a corporation by estoppel if a person has dealt with the company as if it were a corporation. The estoppel defense is more likely to apply to a contract claim rather than a tort claimant.
NOT CLEAR WHETHER TEXAS WILL APPLY THIS DOCTRINE
When is the corporate veil pierced?
If shareholders treat assets of the corporation as their won, use corporate funds to pay their private debts, fail to keep separate corporate books, fail to hold shareholders’ or directors’ meetings, fail to issue stock or generally disregard corporate formalities, AND injustice results from any of these.
Shareholders may be liable if they fail to provide adequate _____ for the corporation.
Capitalization.
Shareholders must put at risk unencumbered capital reasonably adequate for the corporation’s prospective liabilities.
When is a corporation liable on a promoter’s contract?
If the corporation adopts the contract.
Adoption may be express or implied. The promoter remains jointly and severally liable on all preincorporation contracts even after adoption by the newly formed corporation unless there is a novation.
If the contract expressly provides for the promoter’s liability, the promoter is ________ on the contract, both prior to and after formation of the corporation–even if the corporation adopts the contract.
Personally liable.
If the contract is silent as to the promoter’s liability, the promoter will be held _______.
Personally liable, and the same rules apply as if contract had expressly provided for promoter liability.
If the contract expressly provides that the promoter shall not be liable, the contract will be treated as a ______ to the proposed corporation, which can be accepted or rejected after the corporation is formed.
Continuing offer.
Definition: Novation
A substitution of the promoter with the newly formed corporation in a contract.
If a promoter is bound, she is not relieved merely by the corporation’s creation or its adoption of the contract; only if the third party agrees to substitute the corporation for the promoter will the promoter be relieved.
Definition: Subscription Agreement
A subscription agreement is a continuing offer that does not become an enforceable contract until accepted by the corporation.
Subscribers are deemed shareholders only after paying for shares.
Subscriptions made prior to formation of the corporation are ______ for six months, unless otherwise provided or unless all other subscribers consent.
Irrevocable.
Subscriptions to existing corporations may be ______ at any time prior to acceptance by the corporation in writing.
Revoked.
Where par value stock is issued, the corporation must receive at least ______ for each share.
Par value. Price is determined by the corporation.
Issuance of par value shares for less than par is _________ and can result in personal liability.
Watered stock.
_______ may be sold at any price fixed by the board.
Treasury stock.
Do shareholders have any power to control day-to-day affairs?
No. Unless the certificate, bylaws, or a shareholder agreement provides otherwise, shareholders have no power to control day-to-day management of corporate affairs directly.
They may exercise indirect control by election of directors, approval of amendments to the certificate, and approval of fundamental changes in the corporation.
May shareholders act at a meeting?
Yes. Alternatively, they may act without a meeting through consents of ALL of the shareholders entitled to vote. Consents may be in writing or received electronically.
What may a shareholder do if there has been no annual meeting and consents have not been obtained from the shareholders in lieu of the meeting?
If 13 months have passed since the last annual meeting, any shareholder may petition the court to order that a meeting be held.
Who may call a special meeting?
The president, board of directors, 10% of the shares entitled to vote, or any other person authorized by the bylaws or certificate of formation.
Where may a corporate meeting be held?
Anywhere within or outside the state, and if permitted by the certificate or bylaws, via video conference.
When must notice of a meeting be sent to the shareholders?
Notice must be sent not less than 10 days and not more than 60 days (between 10 and 60 days) prior to the meeting.
If merger or share exchange is to be voted on, minimum is 21 days
How must notice of a meeting be given to shareholders?
Notice must be given personally, by mail, or, with the shareholder’s consent, by electronic transmission. Notice may be waived in writing, by electronic transmission, or by attendance.
Shares may be voted in person or by appointment of a _____ executed in writing by the shareholder.
Proxy.
No appointment is valid after 11 months from its date unless otherwise provided in the appointment form.
Proxies are ______ unless the appointment form conspicuously states that the proxy is _______ and the proxy is coupled with an interest.
Revocable; Irrevocable.
What is the “one share, one vote” rule?
Each outstanding share of voting stock is entitled to one vote unless a class is made nonvoting by the certificate of formation.
Definition: Cumulative voting
Cumulative voting is a device that breaks the one share, one vote paradigm to give minority shareholders a greater chance for representation on the board.
Each share gets as many votes as directors being elected. The total number of votes may be divided among the candidates in any manner the shareholder desires.
Who may use cumulative voting?
Shareholders of a corporation incorporated before September 1, 2003 have the right to cumulate their votes unless otherwise provided in the certificate of formation.
Shareholders of a corporation incorporated AFTER that date may only cumulate their votes if expressly permitted by the certificate of formation.
How do shareholders exercise their right to cumulative voting?
In a corporation having cumulative voting, a shareholder must give the corporation’s secretary written notice of her intent to vote cumulatively on or before the day preceding the election.
**All shareholders may cumulate their votes if ANY shareholder has given the required notice.
Definition: Quorum
A quorum is a majority of shares entitled to vote, represented in person or by proxy.
May never consist of less than one-third of the shares entitled to vote.
Once a share is represented at a meeting, it is deemed present for quorum purposes for the remainder of the meeting.
At least ____ days before a meeting, a list of shareholders entitled to vote must be prepared.
11 days.
The list must contain the address and number of shares held by each shareholder.
This list is prima facie evidence as to who is entitled to vote at shareholders’ meetings.
List must be produced and kept open at the time and place of the meeting.
Validity of action taken at the meeting is NOT affected if requirements are not complied with
Definition: Pooling agreement
A pooling agreement is a written agreement among shareholders to vote their shares as the majority of signers direct.
Definition: Shareholder agreement
Shareholders of any corporation NOT listed on a national securities exchange or similar national securities market may enter into agreements regarding how the corporation will be run.
These agreements must be approved by all shareholders when adopted, and its existence must be conspicuously noted on share certificates to be binding on subsequent shareholders.
[Close Corporation]
To form a close corporation, the certificate of formation must state:
“This corporation is a close corporation.”
Share certificates must conspicuously indicate its close corporation status; failure to have such a stock legend does not affect close corporation status.
[Close Corporation]
How do you terminate a close corporation? (2 ways)
- Termination is done by amending its certificate of formation to delete the statement that it is a close corporation. This requires a 2/3 shareholder approval of each class of outstanding shares.
- Alternatively, termination can take place on occurrence of an event or time specified in the certificate of formation and the filing of a termination statement by an officer of the corporation.
Upon termination using either method, a corporation becomes an ordinary corporation.
[Close Corporations]
Who manages a close corporation? (4 options)
Can be managed by:
- Board of directors;
- Directors with limited powers;
- Outsiders;
- Shareholders;
Managed by whoever the certificate of formation or shareholder agreement states.
[Close Corporations]
What happens if the directors or shareholders are in a deadlock regarding how the corporation should be managed?
The court may appoint a provisional director when directors or shareholders are divided respecting management of the corporation. The provisional director will break tie votes to permit shareholder or board action.
Any shareholder who has been a holder of record for at least _______ or who owns at least ______ of outstanding shares of a corporation has a right to examine the corporation books, records, accounts, and minutes and records of the shareholder meetings.
6 months; 5%.
May examine in person or by agent at any reasonable time upon written demand for any proper purpose. A court may allow any shareholder a right of inspection upon showing a proper purpose.
Definition: Preemptive rights
Preemptive rights give shareholders the right to purchase newly issued shares to maintain proportional voting strength. May be waived.
There are no preemptive rights in stock issued for services or property; they exist ONLY in stock issued for money
[Distributions]
Definition: Distributions
The board of directors may make distributions payable in cash, property, or the issuance of indebtedness. Such distributions may be made in the form of a dividend, share purchase, or liquidation payment.
