Corporations Flashcards
Who owns a corporation?
The shareholders
Who manages a corporation?
The board of directors
Who elects the board of directors?
Shareholders
The board appoints people to carry out its policy, those people are…
Officers
What are the three basic requriments for forming a corporation?
A person, paper, and act
How many incorporations are required to form a corporation?
One or more
What does an incorporator do?
Executives the articles of incorporation and delivers them toe the Secretary of State
Does a human person need to serve as an incorporator?
No, it may also be an entity
Does the incorporator need to be a citizen of the state of incorporation?
No
What paper is required to form a corporation?
The articles of incorporation
What magic words must be in the name of a corporation?
Corporation company, incorporated, or limited; or any abbreviation of those words
What are the basic requriments that must be contained in the articles of incorporation?
(1) name of the corporation;
(2) name and address of each incorporator
(3) registered agent and street address of the registered office (in the state of incorporation)
(4) Information regarding stock
Who is the registered agent
The company’s legal representative
Who can recieve serve of process for the corporation?
The registered agent
What information regarding stock must be in the articles of incorporation?
(1) authorized stock: max number of shares that the coronation can issue
(2) if different classes of stock, many states require the articles state the number of shares per class and the voting rights and preferences of each class
May information not required also be placed in the articles
Yes, such as the initial directors and their addresses
Must the articles be notorized?
Yes
What forms the corporation?
Approval and filing of the articles by the Secretary of State
Who holds the organizational meeting?
The initial directors if named in the articles, the incorporators if not
What happens at the organizational meeting?
(1) The initial directors are elected;
(2) and “complete the organization of the corporation,” meaning:
Appoint officers
And adopt initial by-laws
What are the bylaws?
An internal document comprising of an operating manual, with things like setting record dates and methods of giving notice
Do you file the bylaws filed with the state?
No
If there is a conflict between the articles and the bylaws, which document governs
The articles
Who can amend or repeal the bylaws or adopt new ones?
The shareholders or the board of directors
What is the internal affairs rule?
It states that the law of the state of incorporation will governed the internal affairs of the corporation
Can a for profit corporation make contributions to charity
Yes
What is a benefit corporation
One formed for profit and also pursue some benefit to a broader social policy cause
What are the special requirements for a benefit corporation?
(1) The articles must contain a statement that a corporation is a benefit corporation
(2) file an annual benefit report state progress made towards the social policy goals
(3) decision makers must consider the impact of decisions on shareholders and the broader community or environment
Is a corporation double taxed?
Yes
Does a corporation pay tax on its profits?
Yes
Do shareholders pay taxed on distributions to them?
Yes
To avoid being taxed at the corporate level, what type of corporation should we qualify as?
S-Corp
What are the characteristics of an s-corp?
(1) no more than 100 shareholders who are human US cicitzes of residents
(2) one class of stock; AND
(3) not publicly traded
If a corporation incurs a debt, commits a tort, or breaches a contract, are the shareholders personally liable?
No
Generally, what are shareholders liable for?
To pay for their stock
Are directors or offers personally liable for corporate debts?
No
Who is liable for corporation debts
Only the corporation itself
What is the result if a corporation fails to properly form?
The proprietors are personally liable for the business debts because they have only formed a partnership
What two doctrines allow proprietors to escape liability in the event of a defectively formed corporation?
(1) de facto corporation
(2) corporation by estoppel
What is required of anyone assert in either de facto corporation or corporation by estoppel?
They must be unaware of failure to form a de jure corporation
What are the requirements of a de facto corporation?
(1) relevant statute (there always will be)
(2) the sprite smade a good faith , colorable attmept to comply with it
(3) there has been some exercise of corporation privileges (i.e. they are acting as though they are a corp)
What is the result if a corporation is defectively formed but all the requirements of a de facto corporation are met?
The business is treated like a corporation for all purposes except an action by the state
What is an action by the state against a defectively formed corporation called?
Quo warranto
What is a corporation by estoppel?
It means that someone who treats a business as a corporation may be estopped from denying that it is a corporation
In what types of cases does corporation by estoppel apply?
Contracts
What is the status of corporation by estoppel or de facto corporation?
Ablolished in many states
When will a corporation be liable on a contract entered itno by a promoter prior to incorporation?
Only when it adopts the contract
How can a corporation adopt a contract?
(1) expressly by the board
(2) impliedly when the corporation accepts a benefit of the contract
Is the promoter personally liable on a preincorporation contract she enters into?
Yes, until there is a novation, unless the contract clearly states otherwise
Does adoption of the contract automatically remove the promoters liability on the contract?
No, only a valid novation agreement will
What is a foreign corporation?
A corporation that was formed outside the given state
What is required for a foreign corporation to transact business within a state?
It must:
(1) qualify; AND
(2) pay prescribed fees
If a corporation merely owns property in a foreign state, is it subject to qualification and filing fees?
No
What does it mean to “transact business” in a foreign state?
Regularly conducting intrastate business activity.
NOTE: Occasional and sporadic activity in the state does not count
How does a corporation “qualify” to transact business in a foreign state?
(1) getting a certificate of authority from the Secretary of State
(2) appoint a registered agent and maintain a registered office in the state
What is contained in the certificate of authority?
Information from the corporation’s articles and proves good standing in its home state.
What happens if a foreign corporation transactions business within a state without qualifying?
(1) civil fine
(2) the corporation cant assert a claim in the state
Can a foreign corporation be sued and defend against a suit in a state where it has failed to qualify?
Yes
How can a corporation raise capital?
(1) borrow money
(2) raise it by selling stock
(3) both
What does a person who lends money or buys stock get from a corporation?
The corporation issues them a security
What is a security?
Fancy word for investment
What is a debt security?
Arises where the corporation borrows money form X and agrees to repay her with interest.
What is a debt security called?
Bond
Is the person who owns a bond an owner of the corporation?
No they are a creditor
What is an issuance of stock?
Where the corporation sells its own stock
What is a subscription?
A written offer to buy stock from corporation
Is a subscription freely revocable when the offer is made before a corporation is formed?
No it is irrevocable for 6 months unless it says otherwise or all subscribers agree to let you revoke
Is a subscription freely revocable whe the offer is made after a corporation is formed?
Yes until accepted by the corporation
When is a subscription accepted by the corporation?
When the board accepts the offer
What must the corporation recieve when it issue stock?
Consideration
What consideration will be sufficient for a corporation to recieve in exchange for an issuance of stock
Any tangible or intangible property or benefit to the corporation
NOTE: this includes money, property, services already performed, and discharge of a debt, promissory notes, future services to the corporation
What is par value of stock?
Minimum issuance price
Can a corporation get more than the par value in return for its issuance?
Yes
Can a corporation get less than the par value in return for its issuance?
No
What if a stock is listed as “no par”
There is no minimum issuance price, board can set any price
What is treasury stock?
Stock that the company issued and then reacquired
Is treasury stock limited to the par value?
No, the board can set any price it wants when selling treasury stock
If a corporation gives stock in exchange for services or property, who determines the value of those services or property?
The board
Is the boards valuation of proeprty or services in exchange for stock a conclusive determination?
Yes if made in good faith
What is watered stock?
Stock that is received for lower than the par value
EXAMPLE: C Corporation issues 10K of $3 par to X for 22K. There would be 8K of “water”
Who is liable for watered stock?
(1) directors if they knowingly authorized the issuance
(2) X, the person who bought the stock
(3) third parties who recieve the watered stock from X if she did not take in good faith (i..e protected if she took in good faith by not knowing about the water)
What is a preemptive right?
The right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is an new issuance of stock for money
If the articles are silent, do shareholders have preemptive rights
No
Who may be a director of a corporation?
Adult natural person
How many directors must a corporation have?
1 or more
Must the number of directors be set in the articles or bylaws?
Either
After the initial directors are elected, who elects subsequent directors?
Shareholders
How often are the directors elected?
Every year unless there is a staggered board
What is a staggered board?
A board is divided into a half or third, with one half or one third being elected each year
Where is the establishment of a staggered board usually recorded?
In the articles
Can shareholders remove directors before their term is expired?
Yes
On what bases can shareholders remove a director?
With or without cause
NOTE: in some states, directors on a staggered board can only be removed for cause
If there is a vacancy on the board, who fills it?
The board or shareholders;
NOTE: if the shareholders create the vacancy by removing a director, then they generally must select the replacement
True or false the board of directors must act as a group.
True
In an individual director an agent of the corporation?
No
True or false individual directors have no authority to speak for or bind the corporation.
True
How may a board act as a group?
(1) unanimous agreement in writing
(2) at a meeting that satisfies voting and quorum requirements
Does a conference call count as meeting
Yes
Can a void action by the board be later ratified?
Yes
Where is the method for giving notice of a board meeting recorded?
In the bylaws
Is notice required for a regular board meeting?
No
What notice is required for a special meeting?
Unless the bylaws say otherwise the corporation must give 2 days notice of date, time and place of the meeting
Must the notice for a special meeting state the purpose of the meeting?
No
What is the result of a special meeting that was held without the required notice
Whatever happened at the meeting is voidable (maybe void), unless the directors not notified waive the notice defect
How may directors waive the notice defect for a special meeting?
(1) in writing anytime;
(2) by attending the meeting without object at the outset of the meeting
Can a director give proxies or enter voting agreements for how they will vote as directors? Explain why or why not
No, such efforts are void because the directors owe the corporation non-delegable fiduciary duties
Can shareholders give proxies or enter voting agreements?
Yes
What is a quorum for meetings of the board?
A majority of the directors, unless the bylaws say otherwise
What is the result if there is not a quorum present at the board meeting?
The board cannot act
If a quorum is satisfied at a board meeting, how many votes are required for passing a resolution?
A majority of directors present
Can a quorum be broken if directors leave a board meeting?
Yes
What are the general tasks of the board of directors?
Set policy, supervise officers, declare distributions, determines when stock will be issued, recommends fundamental corporation changes to shareholders
Can the board delegate duties to committees of one or more directors?
Yes
What duties can the board not delgate?
(1) The duty to declare distributions
(2) fill a board vacancy;
(3) recommend fundamental change
NOTE: committee can recommend these things to the board for full board action
What duties does a director owe to the corporation?
The duty of care and the duty of loyalty
What is the standard for the duty of care and the duty of loyalty
A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interests of the corporation. She must also use the care that a prudent person in like postition would reasonably believe appropriate under the circumstances
Who bears the burden of proving that a director has breached their duty of care?
The plaintiff
What is nonfeasance?
When the director does nothing, he’s lazy
When is a director liable for breach of his duty of care due to his nonfeasance?
The breach caused loss to the corporation
What is misfeasance?
Where the board makes a decision that hurts the business.
NOTE: causation will be clear in these situations
What is the business judgment rule?
Directors who meet the duty of care and loyalty standard will not be liable for corporation decisions that in hindsight turn out to be poor or erroneous
True or false: the BJR is a presumption that when he board acted, it did appropriate homework.
True
True or false: a director is not a guarantor of success
True
NOTE: PUT THIS IN YOUR ESSAY ANSWER
What does the business judgment rule never apply to
Duty of loyalty cases because it can never apply when the difucary has a conflict of interest
Who bears the burden in duty of loyalty cases
The defendant
What is an interested director transaction?
Transaction between the corporation and a director (or close relative of the director) of that corporation
AKA Self-dealing
Interested director transaction will be set aside (or the director will be liable in damages) UNLESS the director can show:
(1) the deal was fair to the corporation when entered;
(2) her interest and the relevant facts were disclosed or known and the deal was approved by (a) a majority (at least 2) of the disinterested directors; or (b) majority of disinterested shares
What is a quorum required to vote on a self-dealing deal?
Majority of disinterested directors
True or false: all courts require a showing of fairness even if a self-dealing transaction was approved by the appropriate party
False: only some courts require it
Can directors set their own compensation as directors or officers?
Yes, but it must be reaonable and in good faith. If it is excessive, they have breached the duty of loyalty
If a director competes directly with the corporation, she has breached her duty of…
Loyalty
What is the remedy if a director breaches her duty of loyalty by starting a competing venture?
The corporation is entitled to constructive trust on the profits from the competing venture
If a director usurps a corporate opportunity, he has breached his duty of…
Loyalty
What steps must a director take if he wishes to take action that may usurp a corporate opportunity?
(1) tell the board about the opportunity; and
(2) wait for the board to reject the opportunity
What is a corporate opportunity?
(1) something in the corporation’s business line;
(2) something corporation had interest or expectancy in;
(3) something the director found on corporation time or with corporation resources
NOTE: throw in all three tests on an essay
Is a company’s financial inability to pay for a corporate opportunity a defense to a breach of duty of loyalty by usurping a corporation’s opportunity?
Probably not
What is the remedy if a director has breached the duty of loyalty by usurping a corporation’s opportunity?
If director still has the the opportunity, he must sell it to the corporation. If not, the profit from the sale must be held in constructive trust for the corporation
Can a corporation make a loan to a director?
Yes if reasonably excpected to benefit the corporation
What acts generally raise liability for directors?
(1) Improper distributions
(2) improper loans;
(3) ultra vires acts
(4) breaches of fiduciary duties
What is an ultra vires act?
Act making the corporation do something to has no power to do
True or false: a director is presumed to concur either board action unless her dissent or abstention is noted in writing in corporate records
True
What writings are sufficient for a director’s dissent to be noted in?
(1) the minutes;
(2) delivered in writing o the presiding officer at the meeting; or
(3) written dissent to the corporation immediately after the meeting
Is a oral dissent effective?>
Not by itself
Can a director dissent to board action if she voted in favor of it?
No
What are the exceptions to the presumption of concurrence with board action?
Director not liable if:
(1) you were absent from the meeting
(2) you acted in good faith reliance on info presented by an officer, employee, or committee (of which the relying director was not a member), or a professional reasonably believed to be competent
What duties do officers owe the corporation?
The same as directors
Are officer’s agents of the corporation?
Yes, the corporation is the principal
When can an officer bind the corporation?
When the officer has agency authority to do so
True or false: the president generally has inherent authority to bind the corporation to contracts int he ordinary course of business
True
Can one person hold multiple offices?
Yes
Who selects officers?
The board
Who removes officers?
The board
Who sets officer compensation?
The board
May the board fire an officer before the terms of their contract is up?
Yes, but they may be liable for breach of contract
May the shareholders hire and fire officers?
No, the board only
Someone has been sued by (or on behalf of ) the corporation in her capacity as an officer or director. She has incurred costs, attorney’s fees maybe even fines, a judgment or settlement in that litigation.
When can a corporation not indemnify a director or officer?
When it was held that the officer or director recieved an improper benefit
NOTE: an accusation is not enough. There must be a holding
Someone has been sued by the corporation in her capacity as an officer or director. She has incurred costs, attorney’s fees maybe even fines, a judgment or settlement in that litigation.
When must a corporation indemnify a director or officer?
When they prevailed on the merits or otherwise
NOTE: settlement does not count
NOTE: in comes states she must win the entire case, in others she is entitled to indemnification “to the extent” that she wins the case
Someone has been sued by the corporation in her capacity as an officer or director. She has incurred costs, attorney’s fees maybe even fines, a judgment or settlement in that litigation.
When may a corporation indemnify a director or officer for her litigation expenses?
If she shows:
(1) she acted in good faith with reasonable believe the act is in the best interest of the corporation
NOTE: this is the duty of loyalty standard
Who determines a director’s eligibility for reimbursement of litigation expenses?
Disinterested directors; disinterested shares; or independent legal counsel
When may a court order reimbursement of a director or officer?
If it is justified in view of all the circumstances
NOTE: if director or officer was held liable, this is limited to costs and attorney’s fees
Can the articles eliminate director liability to the corporation for damages?
Yes, director liability may be eliminated; but not for intentional misconduct, usurping corporation opportunities, unlawful distributions, or improper personal benefit
NOTE: this means that liability can only be eliminated in duty of care cases
Do shareholders get to manage the corporation
Generally no. The board manages
When can the shareholders manage the corporation?
In a close corporation
NOTE: they shareholders may also elect a board to manage, or they may manage, or they may appoint a manager
What is a close corporation?
(1) few shareholders;
(2) stock is not publicly traded
What is a shareholder management agreement?
This sets up alternative managment for the close corporation
What are the two ways to create a shareholder management agreement?
(1) in the articles and approve by ALL shareholders; OR
(2) by unanimous written shareholder agreement
What is required after a shareholder management agreement has been validly entered into?
It should be noted on all stock certificates
NOTE: failure to do so does not make them invalidated
Who owes the duties of care and loyalty if a shareholder management agreement is set up?
Whoever is actually managing the corporation
What extra fiduciary duty is owed in a close corporation?
Fiduciary duty on shareholders owed to other shareholders. Duty is to act with the utmost good faith
NOTE: because a close corporation is like a partnership
When can minority shareholders sue majority shareholders in a close corporation?
When the minority is being oppressed?
Why can minority shareholders sue majority shareholders in a close corporation?
Because:
(1) oppression thwarts legitimate goals for investing
(2) there is no way out for the minority shareholders
What is a professional corporation?
Corporation that is created by licensed professionals for the purpose of working in the profession
What must be included in the name of a professional corporation?
P.C.; P.A. Or the long form of either
What must be in the articles of a professional corporation?
That the purpose of the corporation is to practice in a particular profession
Who can be the officers, directors, and shareholders in a professional corporation?
Licensed members of the profession
May professional corporations employ non-professionals?
Yes, but not to practice the profession
Are the professional personally liable for their malpractice in a professional corporation?
Yes
Are shareholders in a professional corporation personally liable for corporate obligations?
No
Are shareholders in a professional corporation personally liable for the malpractice of other professionals in the corporation?
No
Can a shareholder be held personally liable for corporation debts?
Generally, no
When may a shareholder be personally liable for corporation debts?
If the court pierces the corporate veil
In what kind of corporation does the doctrine of piercing the corporate veil apply?
In a close corporation only
What is required to pierce the corporate veil?
(1) shareholder must have abused the privilege of incorporating; AND
(2) fairness must require holding them liable
In what types of cases is the court likely to pierce the corporate veil?
(1) alter ego (using corporation funds as your own)
2) undercapitalization (shareholders failed to invest enough to cover future expenses
What will never be sufficient to pierce the corporate veil?
Sloppy administration; i.e. must be more than negligence
True or false: courts may be more willing to pierce the corporate veil for a tort victim than for a contact claimant
True
What is a derivative suit?
A suit where the shareholder is suing to enforce the corporation’s claims, not a personal claim of the shareholder.
It is a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation
What is the key question in determining whether a suit is derivative or direct?
Could the corporation have brought this itself?
If yes, then it’s derivative
True or false: a suit by a shareholder against a director for breach of the duty of care or loyalty is always derivative.
True
Who recieves the judgment If a shareholder is successful ina derivative suit?
The corporation
What does the shareholder plaintiff recover?
The costs and attorney’s fees
Can shareholder recover costs and fees if she loses a shareholder derivative suit?
No
Is the shareholder liable to the defendant he sued for that defendants attorney’s fees?
Yes, if the shareholder sued without reasonable cause
If a shareholder sues on behalf of the corporation and loses, can the other shareholders later sue the same defendant on the same transaction?
No
What are the requirements for bringing a shareholder derivative suit?
(1) shareholder must have owned stock at the time the claim arose and through the suit or gotten by operation of law from someone who owned at that time (i.e. by inheritance or divorce decree)
(2) plaintiff must provide adequate representation for the corporation’s interest;
(3) plaintiff must make written demand on corporation (some states, you must wait 90 days after makiong the demand)
NOTE: in some states a demand is not required when it would be futile, i.e. when the present directors would be the defendants
Is the corporation joined as a defendant in a shareholder derivative suit?
Yes
Is the corporation entitled to make a motion to dismiss a shareholder derivative suit?
Yes, if under an independent investigation, it is concluded that suit is not in the corporation’s best interest (low chance of success, or expense would exceed recovery if the corporation wins).
Who must make an independent investigation into a shareholder derivative suit?
Independent directors or
court appointed panel of one or more people
What requirements must be met for a court to grant a corporations motion to dismiss the derivative suit
(1) those recommending dismissal were truly independent investigators; AND
(2) they made a reaonable investigation
What is authorized stock?
The number of shares a corporation is allowed to issue (its set in the articles)
What is issued stock?
It is the number of shares the corporation has sold
What is outstanding stock?
The shares that the company issued and has not reaquired
True or false: only outstanding stock is entitled to vote
True
NOTE: unless told otherwise, assume that each outstanding share is entitled to one vote
Who is entitled to vote their share of outstanding stock?
The record shareholder
How does one become the record shareholder?
You are the record shareholder is the person shown as the owner in the corporate record as of the record date
If a shareholder dies after the record date has passed, can the executor vote the dead shareholder’s share?
Yes
What is a proxy?
(1) writing;
(2) signed by the record shareholder (email OK);
(3) directed to secretary of corporation;
Authorizing another to vote the shares
How long is a proxy good for?
11 months unless otherwise stated
How can a proxy be revoked?
(1) in writing;
(2) by attending the meeting and voting the shares
If a proxy states that it is irrevocable, can the record shareholder revoke it anyway?
Yes, unless it is coupled with an interest.
NOTE: sufficient interest will be found when the proxy paid for the right to vote the shares
What is a voting trust?
(1) written trust agreement, controlling how the shares will be voted;
(2) copy to the corporation;
(3) transfer legal title to the voting trustee;
(4) original shareholders recieve trust certifications nd retain all shareholder rights except for voting
NOTE: way to pool voting power
What is required to make a valid voting “pooling” agreement?
(1) shareholders must be able to enter into voting agreements;
(2) signed writing
NOTE: this is a separate agreement from the voting trust. In states where voting agreements are allowed, there is no need for a voting trust
Where do shareholders vote?
Usually at a shareholder meeting, but they may act by unanimous written consent signed by all holders of voting shares (email ok)
If a shareholder meeting is held, must it be in the state of incorporation?
No
What are the two kinds of shareholder meetings?
(1) Annual meeting
(2) special meeting
If no annual meeting is held within the last ____ months, a sharehold can petition the court to order one.
15
NOTE: the annual meeting is required
What do shareholders do at the annual meeting?
Elect directors
Who can call a special shareholder meeting?
A meeting called by: (1) the board; (2 ) the president; (3) the holders of at least 10 percent of outstanding shares; (4) anyone else authorized in the bylaws
What can the topic of a special shareholder meeting be on?
Anything the shareholders can vote on
For what shareholder meetings must notice be given?
TRICK QUESTION: all shareholder meetings require notice
Must notice for a shareholder meeting be in writing?
Yes, but fax or email are okay
Who is entitled to notice of a shareholder meeting?
Every shareholder entitled to vote
When must be notice for a shareholder meeting?
No less than 10 days and no more than 60 days before the meeting
What must be included in the notice for the annual shareholder meeting
Date, time, and place of the meeting
What must be included in the notice for a special shareholder meeting?
Everything for the annual meeting plus a statement of the purpose of the meeting
Why must the purpose of the special meeting be included in the meetings notice?
Because the shareholders cannot do anything else at the meeting
What is the consequence if an act is taken at a meeting where proper notice was not given?
The action is voidable (maybe void) unless those not sent notice waive the notice defect
How can a shareholder waive a notice defect in a shareholder meeting?
(1) express in writing and signed
(2) implied attend the meeting without object at the outset
What are the three things shareholders get to vote on?
(1) elect directors;
(2) remove directors;
(3) fundamental corporate changes
NOTE: they may also get to vote on other things if the board asks them to
Is quorum required to vote at a shareholder’s meeting?
Yes
How is a quorum determined for a shareholder meeting?
A quorum is a majority of outstanding shares, NOT shareholders
Can a shareholder quorum be lost if people leave the meeting?
No
What number of votes is required to elect a director?
Plurality (person who gets more votes than any other person)
What number of votes is required to remove a director
Need a majority of shares entitled to vote
NOTE: modern trend is to treat this as other matters
What number of votes is required to approve other matters?
Majority of the shares that actually vote
What number of votes is required to approve other matters?
Majority of the shares that actually vote
What is the purpose of cumulative voting?
Usually allowed only in close corporations:
Gives smaller shareholders a better chance of electing someone to the board of directors
NOTE: only available when shareholders vote to elect directors
How does cumulative voting work?
There is one at large election for directors. The top finishers are elected to the available seats.
To determine how many votes are available to each shareholder, you multiply their shares by the number of available positions
Each person allocates their votes however they want and the top two finishers are elected to the board
If the articles are silent about cumulative voting, does it exist?
No
Can a shareholder sell or give her stock away?
Yes
True or false: stock transfer restrictions are allowable if reasonable
True
If a restriction on stock is valid, can it be enforced against the transferee?
Yes if :
(1) the restriction is conspicuously noted on the stock certificate; or
(2) the transferee had actual knowlege of the restriction
Who has standing to demand access to inspect and copy the books and records of the corporation?
Any shareholder
How may a shareholder gain access to the books for non-controversial things?
Make a written demand at least 5 business days in advance. She need not state a proper purpose
What are non-controversial things that a sharehold may request access to?
Bylaws; articles; minutes of shareholders meeting for past three years; names and addresses of current directors and officers; most recent annual report of the corporation
How may a shareholder gain access to the books for controversial things?
Same as non-controversial things, but the shareholder must also state a proper purpose for the request
What is a proper purpose for requesting controversial materials from the board?
One that is related to your interest as a shareholder
What are considered controversial materials that a shareholder might want to request from the board?
Excerpts of minutes of board evenings; accounting records; record of shareholders
What may a shareholder do if the board refuses her request to inspect the books?
Seek a court order
NOTE: if she wins, she can get reasonable expenses and attorney’s fees making the motion
What is a distribution?
Payments made by the corporation to shareholders
What are the three different types of distributions?
(1) dividends;
(2) repurchase shareholder stock or
(3) redemption (forced sale to corporation at price set in articles)
Distributions are made at the _____ discretion?
Boards
At what point does a shareholder have a right to a dividend or other distribution?
Upon dissolution
True or false: plaintiff (shareholder) must make a very strong showing of abuse of discretion in not issuing a distribution
True
EXAMPLE: the corporation consistently makes profits and the board refuses to declare a dividend while paying themselves a bonus
Is a suit to compel a dividend direct suit or derivative suit?
Direct
If a corporation declares a dividend of $400,000, and there are 100,000 shares of outstanding common stock, who recieves dividends?
Shareholders recieve $4 per share
If a corporation declares a dividend of $400,000, and there are 100,000 shares of common stock and 20,000 shares of preferred stock with a $2 preference, who recieves dividends?
Pay the $40,000 in preferred first; then pay $360,000 to the holders of the common stock shares ($3.60 per share of common stock)
What is an earned surplus?
Money generated by business activity. It consists of all earnings minus all losses minus distributions previously paid
May a distribution be declared from an earned surplus fund?
Yes
What is stated capital?
Money generated by issuing stock. (So is capital surplus)
Can stated capital ever be used to declare a distribution?
No
If Corporation issues 10K shares of $2 par stock and recieves $50,000 how much goes to stated capital and how much goes to capital surplus?
Par issuances, the par goes to stated capital: $20,000 is stated capital, and $30,000 is capital surplus
How is capital surplus calculated?
Payments in excess of par plus amounts allocated in a no-par issuance
Can capital surplus be used for distributions?
Yes, if the corporation informs the shareholders that it is doing so
What is the modern view of funds that can be used to declare a distribution?
It does not look to the specific fund, but says that a corporation cannot make a distribution if it is insolvent or the distribution would render it insolvent
What does insolvent mean?
(1) the corporation can’t pay it’s debts as they come due
2) total assets are less than total liabilities (including preferential iquidation rights
True or false: directors are jointly and severally liable for improper distributions
True
True or False: shareholders are generally jointly and severally liable for improper distributions
False: they are liable only if they knew the distribution was improper when they recieved it
What are the things that constitute fundamental corporate change?
(1) amendments to the articles;
(2) merging or consolidating into another company;
(3) transfer substantially all assets or havbeing stock acquired in a share exange;
(4) convert to another form of business;
(5) Dissolve
What is required to enact fundemental corporate change?
(1) board action adopting a resolution of fundamental change;
(2) board submits proposal to shareholders with written notice;
(3) shareholders approve the resolution
(4) in most changes, must deliver a document to the Secretary of State
What shareholder vote is required to enact fundamental corporate change?
Majority of shares entitled to the vote (apply this test!)
Increasing number of states are only requiring a majority of the shares that actually vote
What is the dissenting sharehold right of appraisal?
Right to force the corporation to buy your stock for fair value
What acts of fundamental corporate change trigger dissenter’s rights (rights of appraisal)
(1) merging or consolidating
(2) transferring substantially all assets
(3) stock being acquired in a share exchange; OR
(4) conversion to another form of business
Is there dissenters rights if the corporation’s stock is listed on a nationa exchange or if the company has 2,000 or more shareholders?
No
Dissenters rights only exist in what kind of corporation?
Close corporation
How does a shareholder perfect their right of appraisal?
(1) before the shareholder vote, file with the corporation a written notice of objection and intent to demand payment;
(2) at the shareholder vote,abstain or vote against the prosper change; AND
(3) after the vote, within time set by corporation, make a written demand to be bought out and exploit stock with the corporation
What happens if the corporation and the dissenting shareholder cannot agree on the fair value of the shares to be bought?
The corporation sues and the court may appoint an appraiser
Is the right of appraisal the shareholder’s elusive remedy if she does not like a fundamental change?
Yes
What is required to amend the articles of incorporation?
(1) board action and notice to shareholders
(2) shareholder approval (majority of the shares entitled to vote)
(3) if approved, deliver amended articles to the Secretary of State
Are there dissenter’s rights triggered when the board and shareholders vote to amend the articles?
Generally no
What is required for a corporation to merge or consolidate?
(1) board action (of both corporations) and notice to shareholders;
(2) shareholder approval by a majority of the shares entitled to vote (generally both corporations)(no shareholder approval required if 90% or more owned subsidiary is merged into parent corporation —called a short form merger)
(3) if approved, surviving corporation delivers articles of merger or consolidation to Secretary of State
Is a dissenting shareholder entitled to dissenters rights of appraisal when the corporation merges or consolidates?
Yes
Can a creditor of a constituent corporation (the one merged or consolidated) sue the surging corporation
Yes, this is called successor liability
What constitutes “substantially all of the assets”?
Varies from state to state, but generally anything above 75% of the assets
Is the transfer of all or substantially all of the assets fundamental change for the selling corporation?
Yes
Is the transfer of all or substantially all of the assets fundamental change for the buying corporation?
No
What is required for a corporation to sell all or substantially all of its assets?
(1) board action (both corporations) and notice to the selling company’s shareholders;
(2) approval by the selling company’s shareholders (majority of shares entitled to vote)
(3) delivery to the Secretary of State articles of examine in share exchange (no filing required in a transfer of assets)
Are there dissenter’s rights triggered by the transfer of all or substantially all of the assets fundamental change for the selling corporation?
Yes
Are there dissenter’s rights triggered by the transfer of all or substantially all of the assets fundamental change for the buying corporation?
No
True or false: there will be successor liability if a court concludes that the transfer of assets was really a disguised (de facto) merger
True
What is required for a business to convert to another form? Example: Corporation to LLC.
(1) board approval;
(2) notice to shareholders
(3) share holder approval;
(4) deliver documents to the Secretary of State
(5) dissenting shareholders have a right of appraisal
What is required in a voluntary dissolution?
(1) board action
(2) shareholder approval
(3) file notice of intent to dissolve with Secretary of State
(4) corporation stays in existence to wind up
(5) notify creditors to they can make claims
What is an involuntary dissolution?
Ordered by the court:
(1) shareholder petition because of: (a) director abuse; (b) waste of assets; (c) shareholder fail at consecutive annual meetings to fill a board vacancy
(2) creditor can petition because corption is insolvent and he has an unsatisfied judgment or the corpation admits the debt in writing
Is dissolution the end of the corporation?
No it is the beginning of a process that will end the corporation’s existence
Can the corporation sue and be sued during dissolution?
Yes
Can the corporation start new business during dissolutio ?
No, but it must wind up (i.e. liquidate all its assets)
What are the steps taken in winding up?
(1) give written notice to known creditors and publish notice of dissolution in a newspaper int he county of its principal place of business;
(2) gather all assets;
(3) convert the assets to cash;
(4) pay creditors;
(5) distributive any remaining sums to shareholder, pro-rata, by share unless there is a liquidation preference
What is a liquidation preference?
It means pay first, so it works like a dividend preference but comes up in a dissolution
Should you email the corporations lecturer with questions?
No, only phone calls
What is the corporation lecturers phone number?
404-727-6838: leave specific questions on the voicemail
