Corporations Flashcards
what must the plaintiff prove in piercing the corporate veil?
o Plaintiff must prove incorporation was just a formality and C neglected corporate formalities and protocols
What does the court consider when determining if the business was a sham for PCV
Factors considered—undercapitalization, disregard of corporate formalities, using C’s assets as SH’s own assets, self-dealing with C, siphoning of C’s funds, using corporate form to avoid statutory requirements, SH’s domination over C, or fraudulent dealings with corporate creditor
When do courts PCV for contract claims?
generally very reluctant to do so - only when the SH committed actual fraud
When is a shareholder going to be held liable
only if the corporate veil was pierced or if they were active in the management of the corporation.
Do officers of corporations, as agents for the corporation, incur liability to third parties for the performance of duties for the corporation?
Generally no, BUT an officer may be held liable to a third person when the officer has engaged in purposeful tortious behavior.
What are the duties an officer owes to their corporation?
duty of loyalty and duty of care
What’s the de facto corporation doctrine?
(if it hasn’t been abolished in texas) There are three requirements for the common-law doctrine of de facto corporation: (1) a statutory law for formation of the corporation; (2) a good-faith effort to comply with the law; and (3) the owners and operators must operate under the corporate name.
When is a corporation required to indemnify a director?
for any reasonable expense incurred in the wholly successful defense of a proceeding against the D in his role as D (can succeed on merits or procedurally)
When is a corporation prohibited from indemnifying a director?
C is prohibited from indemnifying a D against liability due to the receipt of an improper personal benefit
When MAY a corporation indemnify a director?
C may indemnify a D in an unsuccessful defense if D acted in good faith with reasonable belief that the conduct was in C’s best interest and (in a criminal proceeding) D did not have reasonable cause to believe conduct was unlawful
How is eligibility for indemnity determined?
Eligibility for indemnification may be determined by majority vote of disinterested Ds or a disinterested committee, SH vote excluding shares held by interested Ds; or special legal counsel appointed by BD; also, if permissive indemnification would be allowed, by provision in governing documents, resolution, or agreement
Proper issuance of stock
The issuance of stock must be authorized by the board of directors. In Texas, shares may be issued by a corporation in exchange for any benefits (tangible or intangible) to the corporation, including cash, promissory notes, services already performed, and contracts for services to be performed. The full consideration agreed upon must be received by the corporation before the shares may be issued.
When is the right of first refusal valid?
The right of first refusal is a restriction on the sale of stock. Restrictions are effective against third parties only if the restrictions were known to the third party or if the restrictions are conspicuously noted on the certificate or the notice of ownership. After shares are issued, subsequent restrictions against the transfer of the shares may not be imposed unless the holder of the shares voted in favor of the restrictions or voted in support of an agreement imposing the restrictions.
Can a C indemnify a D in a criminal case?
Yes, the corporation may indemnify the director when she did not have reasonable cause to believe her conduct was unlawful
Do shareholders have preemptive rights?
AFTER Septmber 1, 2003, Generally no, shareholders do not have preemptive rights except to the extent provided in the certificate of formation.
If before Sept 1, 2003 – automatically possess preemptive rights, unless the certificate of formation (or other agreement) states otherwise
Can a shareholder revoke their waiver of preemptive rights? Written or oral?
According to the TBOC, a written waiver of preemptive is irrevocable, but an oral waiver may be revoked. If revocation is permitted, the shareholder can still revoke their waiver, unless the corporation has relied on the waiver, in which case it would not be fair to let the shareholder revoke their waiver.
Do preemptive right exist with respect to shares issued as compensation to an officer or for consideration other than money?
No, unless expressly provided for under the TBOC
What are preemptive rights
Preemptive rights allow shareholders, usually in a closely held corporation, to maintain their percentage of ownership in a corporation by having the first opportunity to buy the corporation’s stock whenever new stock is issued
What does someone need to do in order to exercise their preemptive rights
In order to enforce preemptive rights, the shareholder must bring an action within a prescribed period of time—one year after notice if the corporation has given the shareholder written notice, or four years after the stock has been issued, sold, or otherwise distributed, if notice has not been given to the shareholder
How much stock is someone entitled with their preemptive rights?
Only what would be needed to maintain their ownership percentage.
A and B, the only shareholders of Corporation X, each own 50 shares of stock. The board of directors of Corporation X authorizes the issuance of another 20 shares of stock.
With preemptive rights, A and B would each be entitled to purchase 10 additional shares of stock and thereby each would retain a 50% ownership interest in the corporation. Without such rights, A or B could become the controlling owner of Corporation X by purchasing at least 11 additional shares of new stock offering.
Unless otherwise specifically provided for in the formation documents, preemptive rights do not exist in the following circumstances:
i) Stock issued for services or property;
ii) Stock sold or granted as compensation to directors, officers, employees, or agents of the corporation or an affiliate or subsidiary of the corporation;
iii) Shares issued within six months of corporate formation;
iv) Preferred shares and nonvoting shares; and
v) Shares with preemptive rights not acquired within the first year of their offering.
Can a shareholder who disagrees with a merger force the corporation to purchase his shares?
Yes, a shareholder who objects to the terms of the merger, consolidation, or interest exchange, or to the sale of all or substantially all of the assets of the corporation may be able to force the corporation to buy his stock at a fair value as determined by an appraisal.
Policy – it is considered unfair to force dissenters to remain in a “fundamentally” changed corporation
What should a shareholder do if they disagree with a merger?
If the proposed action is to be submitted to a vote of the owners at a meeting, the dissenting shareholder must give notice of his dissent to the president and secretary of the corporation, stating that the owner’s right to dissent will be exercised if the action takes effect
How long does have a shareholder have to seek payment on their shares after being given notice a merger or other action they disagreed with took effect?
20 days
What do you need to have a valid shareholders agreement
It needs to be signed by all the shareholders in their shareholder capacity and then filed with the secretary of the corporation at its principal office and then with the secretary of state
What do you need to have a valid name for a corporation
It must contain the word corporation, incorporated, or company. Cannot be deceptively similar to another name, be misleading, or make it sound like an illegal business
