Corporations

Question 1

Org of TX Corps: Person

Answer 1

Organizer (person or entity) executes the certificate and delivers it to Secretary of State

Question 2

Org of TX Corps: Paper

Answer 2

Certificate of Formation—

names and addresses. Can preserve name with secretary of state for 120 days.

o Name of Corp: Assumed name certificate with secretary of state and county clerk in county of its registered office (or principal office). Cannot sue (but can be sued) in TX until it does this
o Name and address of each organizer
o Number of initial directors
o Name and address of each initial director/managers
o Name of the corporate agent

No duration, then assumed perpetual Cert

Must Include a Statement of Purpose

Capital structure (authorized stock: max/issued: actually sells/outstanding: shares corp has issued and not reacquire)
o Must incl (1) authorized stock, (2) number of shares per class, and (3) info on par value, voting rights, and prefs of each class

Question 3

Statement of Purpose (basis for Ultra Vires and Deriv Suit)

Answer 3

Can be general; must be in Certificate of Formation

Ultra Vires Act (making co do things it has no power to do) to enjoin acts that stray from this:
—valid K (not illegal) but SHs can sue for an injunction;
—responsible managers liable to corp for ultra vires losses (through derivative action: (i) P must own shares at time of challenged act (or by op of law); (ii) fairly and adequately rep corp int; (iii) b4 instituting must make demand on board to take action and wait 90 days for response—unless board rejects sooner or delay would cause irreparable damage)

Deriv suit can be dismissed if majority of disinterested, ind BoD determine in good faith, after reasonable inquiry, that continuation of suit not in Co’s best int

Question 4

Org of TX Corps: Act

Answer 4

Organizers sign cert, deliver to secretary and pay the required fee. On filing, corp existence begins.

Question 5

Other Steps to Forming an Org

Answer 5

Org Meeting: Board holds this meeting. There, board (1) selects officers, (2) adopts bylaws, and (3) may transact other co business. 3 days’ notice of meeting.

Bylaws: Internal document. Required but are internal (no filing). Can repealed by board or SHs. Certificate takes precedence if conflict

Question 6

Defective Incorporation (De Facto Reqs and Estoppel)

Answer 6

De Facto Corp Requirements: If so then treated as a corp for all purposes except an action by the state.
• There is a relevant incorp statute
• Parties made good faith, colorable attempt to comply with it AND
• Some exercise of corp privileges (acting like we have a corp)

Corporation by Estoppel: 1 who treats a business as a corp may be estopped from denying that it is a corp.

Question 7

Pre-Incorporation Ks

Answer 7

Promoter is a person acting on behalf of a corp not yet formed. May K w/ a 3rd party on behalf of a corp not yet formed.

Corp is not liable on pre-incorp Ks until it adopts the K. Adoption makes the corp liable too but does not relieve Promoter (both are liable)

Promoter, unless K says differently, is liable on pre-incorp Ks until there is a novation (i.e., an agreement of the promoter, corp, and other King party that the corp replaces the promoted under the K).

Question 8

Foreign Corps (Long Arm Statute)

Answer 8

Must qualify/register and pay prescribed fees to transact in TX. Applies by giving basic information from certificate and proving good standing in home state. Then can sue in TX.

If no register, (1) civil fine and (2) co cannot sue in TX from a claim arising from business in TX.

Question 9

Subscriptions

Answer 9

written, signed offers to buy stock from corp)

Pre-incorporation subscriptions are irrevocable for 6 months

Post-incorporation subscriptions are revocable until accepted by the corp

Corp and subscriber oligated under the subscription agreement when the board accepts the offer and co notifies the subscriber in writing.

Subscriber whose subscription has been accepted becomes a SH when she pays for the stock.

Question 10

Preemptive Right

Answer 10

Default is no preemptive rights

Right of an existing SH of c-stock to maintain her % of ownership by buying stock (incl treasury stock) whenever there is a new issuance of stock FOR MONEY (not options to officers)

Cert of Formation must explicitly mention this right. Also, no preemptive rights if the issuance is within 6 months of formation of the corp (unless cer says otherwise)

TBOC says written waiver of right required; no preemptive right wrt officer compensation absent explicit right on certificate

Question 11

Directors—Statutory Requirements

Answer 11

Adult Natural Persons

Number: Just 1+, initially set in cert and then in cert or bylaws.

Election: Initial named in cert, thereafter SHs elect at annual meeting

Entire board is elected each year unless bylaws provide for a “classified board”—half or thirds elected each year

Removal: SHs can remove before board member’s term expires with or without cause.

Vacancy: Board or SHs fill.

Board must act as a group, individual directors not agents of the corp. No authority to speak for or bind the corp. Officers are agents of the corp.

Question 12

Board action by:

Answer 12

(1) unanimous written consent to do something or (2) a meeting satisfying quorum and voting reqs.

Question 13

Notice Required for Board Meetings

Answer 13

Notice (stating date, time, and place—need not state the meeting’s purpose) only required for special meetings.

Failure to prvide notice means whatever happened at meeting is voidable unless directors not notified waive notice defect: by (1) in writing at any time or (2) by attending the meeting without objecting at the outset to the meeting.

Meeting can be held outside of TX; notice determined by bylaws; NO proxies

Question 14

Board’s Role

Answer 14

Board manages the business. Sets policy, supervises officers, declares distributions, decides when the corp should issue stocks, etc.

Exceptions: close corps/committee of 1+ directors (if bylaw or cert allows, board can appoint a committee to which it can delegate power (could declare distributions) but cannot amend bylaws, select officers or recommend a fundamental corp change to SHs)

Question 15

Duty of Care

Answer 15

A director owes a duty of care to the corp. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances. Non-delegable fiduciary duty.

Nonfeasance (director does nothing): liable only if his breach caused a loss to the corp (tough to show). Causation required.

Misfeasance (the board does something that hurts the corp-causation is clear): Not liable if meets the BJR (presumption that when the board took the act it did appropriate homework. Burden on P to show board either did not do HW or did something very dumb.)

Question 16

Duty of Loyalty

Answer 16

Conflict of interest, burden on D

Director owes the corp a duty of loyalty. Must act in good faith and with a reasonable belief that her act is in the corp’s best interest.

Interested Director transaction: Set aside unless (1) deal was fair to the corp when approved OR (2) her interest and the material facts were disclosed or known and the deal was approved in good faith by either of the two groups: (a) SHs or (b) majority of disinterested directors (even if less than a quorum)

Competing Venture: Cannot compete without approval of majority of disinterested SHs.

Corporate Opportunity: Director cannot usurp a corporate opportunity (anything director has reason to know co would be interested in). Means the director cannot take it until he: (1) tells the board and (2) waits for the board to reject the opportunity.

Damages: Must sell at cost and corp gets profit. Corps can renounce in cert of formation or by board action.

Question 17

Director Liability

Answer 17

Directors may be liable to the corp for improper distributions, improper loans, ultra vires acts, and breaches of fiduciary duties.

A director is presumed to have concurred w/board action unless her dissent or abstention is noted in writing (put in the mnutes; sending a note to the corp sec at the meeting; or sending a resgistered letter to the corp sec immediately after the meeting) in corp records

Question 18

Director Defenses to Liability

Answer 18

Not liable if absent from the meeting;

good faith reliance on info represented by an officer or provided by a competent professional or by an employee or by a committee of which the director relying was not a member. No good if person giving info was incompetent

Question 19

Officers (Duties; Status; Selection and Removal)

Answer 19

Owe the same duties of care and loyalty as directors

Status: Officers are agents of the corp. Can bind the corp by acts w/in their authority. President has inherent authority to convey corp real prop only if the board gives such authority. Outside, may have inherent authority to bind the corp to a K entered in ordinary course of business.

Selection and Removal: Officers are selected by and removed by the board, which alse sets office compensation.

Note: SHs hire and fire directors who hire and fire officers.

Question 20

Indemnification of Directors and Officers (Forbidden; permitted; eligibility determination; lit expenses advancement)

Answer 20

Corp forbidden from reimbursing when the director/officer is held liable for willful or intentional misconduct in performing a duty to the corp

Corp required to reimburse if wins judgment on the entire case
—Court can order reimbursement if it finds justified on the facts

Corp permitted to reimburse neither of above, but was held liable to the corp or to have received an improper personal benefit, can only get expenses and attorney’s fees (not the judgment)

Eligibility determined by (1) majority of disinterested directors or committee or shares or (2) ind legal counsel

Can advance lit expenses if D/O gives an affidavit of her good faith that she believes acted in good faith and with reasonable belief actions in corp’s best interest and a written undertaking to repay the expenses if determined she did not

Question 21

SHs / SH Mgmt Agreement

Answer 21

Do not manage corp unless close corp (may not have a board): (1) few SHs and (2) private stock. Cert must call it a “close corp”

SH Mgmt Agreement (SMA): Sets up alt mgmt. in the close corp. (1) in cert or bylaws and approved by all SHs or (2) written agreement of all SHs
• Stock certs should note close corp status and what the mgmt. structure is, but failure to do so does not affect close corp status
• The corp should deliver to each SH a copy of the agreement but failure to do so does not affect its validity
• Once the corp starts operating under the SHs’ agreement, it may deliver a Statement of Op to the Sec of State for filing. Manner of op = matter of public record.
• Once the statement of op is filed, agreement is binding on all SHs and transferees.

Whenever the corp is managed by someone other than a BoD, they also owe of duties of care and loyalty.

SHs do not owe each other fiduciary duties as a matter of law. But a court may find a fiduciary duty depending on the facts of a given case.

Question 22

When SH liable for Corp Debts

Answer 22

Pierce the Veil when: (1) SHs abused privilege of incorporating and (2) limited liability would be unfair.

Only happens in close corps. Never automatic. No PCV for a K claim unless SH made the corporation commit fraud for his own personal benefit.

Question 23

Derivative Suits

Answer 23

SH must:

• Have stock ownership when the claim arose or received by “op of law” (e.g., inheritance or divorce decree) from someone who did.
• Fairly and adequately rep the corp’s interests (own stock throughout lit)
• Make a written demand on directors that the corp bring suit (can’t file suit until 90 days after demand unless demand is rejected before that or waiting 90 days would cause irreparable harm to the corp)
• Demand never excused (even if futile) and must set forth claim with particularity

Corp must be joined as D cuz did not sue on its own.

Not settle or dismiss without court approval

Corp may move to dismiss based on finding of disinterested, ind directors that the suit is not in the company’s best interest. Court must dismiss if finds made in good faith and by ind, disinterested SHs.

Question 24

SH Voting: Who Votes? (Eligibility)

Answer 24

Vote if you are the record SH as of the record date. Voter eligibility cutoff set no more than 60 days (no less than 21 days for merger or consolidation) before the meeting (if no record date is set then deemed date of notice of meeting given)

Question 25

SH Proxy Voting

Answer 25

Proxies: (i) writing (ii) signed by record SH (iii) directed to corp secretary (iv) authorizing another to vote the shares as agency relationship

Good for 11 months unless proxy says otherwise. Can revoke if (1) in writing to corp secretary and (2) by SH attending the meeting and voting—can do this even if SH had stated it was irrevocable (unless labeled as irrevocable and coupled with interest)

Question 26

SH Voting Trust

Answer 26

No time limit imposed by corp law

Written trust agreement controlling how shares will be voted

File a copy with the corp

Transfer legal title of shares to voting transferee

Original SHs receive trust certs and retain all SH rights other than voting

Question 27

SH Vote Pooling Agreement

Answer 27

No time limit imposed by corp law

Must be in writing and copy given to corp sec

Can be enforceable against transferee if affected stock cert conspicuously notes the agreement

Question 28

Validating Corp Act

Answer 28

SHs make valid corp act by: 1) unanimous consent in writing and signed or by electronic transmission of holders of all voting shares or 2) a meeting that satisfies quorum and voting rules

Question 29

2 Kinds of Meetings and their Requirements

Answer 29

Annual: must be held (if none held within 13 months, a SH may petition the court to order one) to elect directors

Special can be called by (a) the Board, (b) President (c) holder of at least 10% of shares entitled to vote or (d) anyone else permitted in cert

Question 30

Notice of Vote

Answer 30

Must give written notice to every SH entitled to vote, for every meeting b/w 10 and 60 days before the meeting (21 to 60 if considering fundamental change)

Given personally or by mail or, if SH consents, by email

Must state when, where, and why meeting is being held
o If proper notice not given then voidable unless those not sent notice expressly (in writing anytime) or impliedly (by attending the meeting without objection) waive notice.

Question 31

SHs get to vote to:

Answer 31

(a) to elect directors (b) to remove directors (c) on fundamental corp changes, and (c) on misc things like amending bylaws.

Question 32

Requirements for a SH vote

Answer 32

Must have a quorum (50% +1) for every SH vote—determine by number of o/s (not repurch/treasury) shares represented (not number of SHs)

Doesn’t count SHs who show up to protest the meeting

Question 33

Requirements for voting (Elect Director; Remove Director; Misc Matters)

Answer 33

Plurality required to elect a director

Majority entitled to vote to remove a director and to approve a fundamental change

Misc matters—majority of shares that actually vote on issue

Question 34

Cumulative Voting (only available for what?)

Answer 34

Only available in electing directors. Don’t vote for each seat individually, have at-large election. Top 2 elected.

Cert must expressly state this ability

At least 1 SH must be given notice to corp sec of intent to cumulate. If 1 SH gives such notice no later than the day before the meeting, all SHs can vote cumulatively.

Question 35

Stock Transfer Restrictions

Answer 35

or limit on how much stock someone can own

Must be in the cert or bylaws or by agreement. Okay if not an undue restraint on alienation.

Even if valid, cannot be invoked against the transferee unless either (a) it is conspicuously noted on the stock cert or (b) the transferee had actual knowledge of restriction (will be considered on notice if shares indicate they are shares of a closely held corp and may be subj to SH agree)

Question 36

SH’s Rights to Inspect Corp Books and Records

Answer 36

Any SH who has (1) owned stock for at least 6 months OR (2) owns at least 5% of o/s shares (even if only for a short time)

Must make a written demand for a proper purpose—related to interest as a SH. If denied, can get a court order and recover exp/attny fees. Corp has burden of showing SH’s purpose was improper.

Question 37

Distributions

Answer 37

Declared at Board’s discretion, suit forcing has high burden of showing abuse of discretion

Preferred get paid first. Paid from surplus (not stated capital—comes from par value)

Directors JSL to corp for unlawful dist.

Question 38

Fundamental Corp Change

Answer 38

(1) board takes an action adopting a resolution of a fundamental change; (2) board must submit proposal to SHs w/written notice; (3) fundamental change must be approved by supermajority of SHs (2/3 entitled to vote); (4) doc delivered to sec of st for filing

Question 39

Right of Appraisal

Answer 39

For dissenting SHs is right to have corp pay FMV for stock. Triggered by merger; sale of shares in a share exchange; transfer substantially all asssets; or conversion—still ONLY EXISTS FOR CLOSE CORPS (public can just sell on open market)

To perfect right:
• Before SH vote, file w/corp written notice of objection and of intent to demand payment
• At, abstain or vote against the proposed change AND
• After the vote, w/in 20 days of notification by the corp, make written demand to be bought out

Question 40

Amending the Cert of Formation

Answer 40

BoD action and SH approval (2/3 supermajority). If approved, deliver amended cert to Sec of St for filing

Question 41

Mergers

Answer 41

BoD action (both corps) and SH approval (always for disappearing corp: unless short form merger of less than 90% sub merged with parent—appraisal right)

If approved, deliver to sec of st for filing. Surviving corp assumes all rights and liabilities of disappearing company

Question 42

Converting Entity Status

Answer 42

Can convert to another form of business org. Requires board action and 2/3 of shares entitled to vote’s approval. Deliver cert of conversion to Sec of St for filing. Dissenting = appraisal rights

Question 43

Asset Transfer

Answer 43

Fundamental corp changes for the seller. Required BoD action (both corps) and approval by selling corp’s SHs (2/3 approval entitled to vote)

Appraisal rights for SHs selling corp only.

Question 44

Termination (Voluntary or Involuntary)

Answer 44

Voluntary: Written consent of all SHs or BoD action and approval by 2/3 shares entitled to vote. Then send notice of intent to wind up creditors. Then liquidation process. Can revoke if fraudulent termination notice any time before corp ceases to exist.

Involuntary:
• TX Attorney General: can institute for (1) fraud in cert; (2) ultra vires activity; (3) misrep in req’d reports or (4) public interest reqs
• Creditors can seek based on irreparable harm to unsecured creditor
• Creditors can seek receiver appointment because corp insolvent and creditor either has an unsatisfied judgment or corp admits in writing that amount is due.
• SH can seek receiver appointment for insolvency, waste, director deadlock, SH deadlock and dialed at 2 annual meetings to fill vacant board position, or illegal/oppressive/fraud director acts
———Receiver serves for 12 months

Admin Termination: TX Sec of St may issue a cert of termination for corp’s failure to pay fees or maintain a registered agent or file required reports. Must be given 90 days’ notice. Or fail to pay franchise tax w/in 45 days of notice.

Termination triggers liquidation process: (a) give notice to creditors, (b) gather all assets/convert to cash, (c) pay creditors, and (d) distribute remainder (if any) to SHs.