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Corporations Flashcards

Learn corporations

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1
Q

Requirements to create a corporation

A
  • One or more “people” incorporators (includes natural persons and corporations)
  • Articles of incorporation
  • Articles filed with Sec of State
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2
Q

Articles of incorporation are a contract between

A

Between (1) the corporation and shareholders and (2) the corporation and the state

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3
Q

Articles of incorporation statement of purpose

A

Usually just “to engage in all lawful activity”

If more specific statement of purpose and corporation violates that purpose, it’s acting ultra vires

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4
Q

What does it mean when a corporation acts “ultra vires” re: articles of incorporation and what are potential remedies?

A

(1) Shareholders can seek injunction to stop ultra vires activity and (2) corporation can sue the responsible managers for the ultra vires act

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5
Q

Types of stock

A

Authorized stock: maximum number of shares the corp. can sell

Issued stock: number of shares the corp. actually sells

Outstanding stock: shares issued and not reacquired by corp.

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6
Q

Authorized stock

A

Authorized stock: maximum number of shares the corp. can sell

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7
Q

Issued stock

A

Issued stock: number of shares the corp. actually sells

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8
Q

Outstanding stock

A

Outstanding stock: shares issued and not reacquired by corp.

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9
Q

Stock information that must be included in articles of incorporation

A

Authorized stock,

number of shares per class,

information on voting rights and preferences of each class

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10
Q

What law governs the internal affairs of a corp.?

A

The law of state where corporation is formed

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11
Q

Double taxation

A

The corporation is taxed on its profits, and shareholders are taxed when profits are distributed to them

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12
Q

Can a corp avoid double taxation?

A

By forming S corporation: 100 shareholders max, all human U.S. citizens, one class of stock not publicly traded

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13
Q

Are directors or officers liable for what corp does?

A

No

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14
Q

Are shareholders liable for what corp does?

A

No

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15
Q

De facto corporation doctrine

A

In event of failed attempt to make a corporation, the entity is treated as a corporation for all actions except ones by the state (quo warranto)

Requirements:

(1) applicable incorporation statute (always met)
(2) a good-faith, colorable attempt to make a corporation under the statute
(3) some acts carried out as if corporation existed

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16
Q

Corporation by estoppel

A

If you treat a business like a corporation you can be estopped from later denying it is a corporation

Applies ONLY to contract claims, not tort claims

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17
Q

Corporation’s bylaws

A

The internal governance structures

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18
Q

Who creates bylaws?

A

The directors at organizational meeting

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19
Q

Who can repeal or amend the bylaws?

A

Shareholders and sometimes the board

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20
Q

If bylaws and articles of incorporation conflict, which controls? Why?

A

Articles - because it’s a contract with the state

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21
Q

Definition “promoter”

A

Someone acting on behalf of a corporation not yet formed (e.g., an entrepreneur)

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22
Q

When corporation is liable for contracts formed before the corporation was formed

A

When the corporation ADOPTS the contracts, expressly (board action) or impliedly (corporation accepts a benefit of the contract).

Note: the promoter will REMAIN liable for the pre-formation contract unless and until there’s a proper NOVATION making the corporation the new party

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23
Q

Definition “foreign corporation”

A

Any corporation outside the state.

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24
Q

Definition stock issuance

A

When the corporation sells its own stock

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25
Q

Definition subscription re: stock issuance

A

A written offer to buy stock from the corporation.

Pre-incorporation subscriptions: not revocable for six months

Post-incorporation subscriptions: revocable until acceptance (i.e., when the board accepts the offer).

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26
Q

Acceptable consideration for stock

A

Always okay: money, property, services already performed

Depends on state: promissory notes and promises of future services

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27
Q

Definition “par”

A

The minimum price of an issuance stock

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28
Q

Definition “no par”

A

When the issuance of stock has no minimum price

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29
Q

Who sets price of issuing stock?

A

The board

30
Q

Definition “treasury stock”

A

The stock the company issued and then reacquired

31
Q

Board’s valuation of stock is conclusive if

A

Made in good faith

32
Q

Definition “watered stock”

A

when stock is sold for less than par (i.e., for less than the minimum price). The difference is called “water”

33
Q

Who is liable if there is watered stock?

A

The board of directors if did it knowingly

The guy who bought it

Third parties who acquired knowingly

34
Q

Definition “pre-emptive right”

A

Right of existing shareholder to maintain her percentage of ownership by buying stock that’s newly issued

In most states, no pre-emptive rights unless expressly granted

35
Q

Requirements to be a director

A

Must be adult natural person

36
Q

Standard for shareholders to remove a director

A

Can be with or without cause, and shareholders can replace

37
Q

Who can replace a director that the shareholders have removed?

A

The shareholders

38
Q

How can board of directors act?

A

Unanimous writing

At a meeting with quorum (majority of all directors) and voting requirements met (majority of directors present)

39
Q

Directors: duty of care v. duty of loyalty

A

Duty of care:
must act in good faith and as reasonably prudent person to the corporation as she would to her own business. Breach through nonfeasance or misfeasance. Misfeasance subject to “business judgment rule”: a director is not liable if (1) decision was informed, (2) made in good faith, (3) without conflicts of interest, (4) had a rational basis.
Burden on plaintiff to show.

Duty of loyalty:
must act in good faith and with reasonable belief that director is acting in corporation’s best interest. No BJR.
Burden on defendant to show.

40
Q

Ways for director to violate duty of loyalty

A

(1) TRANSACTION between the corporation and the director (or close family member): burden shifts to D to show fair or that board of directors approved of the transaction.
(2) COMPETING VENTURES: director cannot compete with the corporation
(3) CORPORATE OPPORTUNITY: director cannot exploit business opportunity that company might want, unless with permission from board.

41
Q

Officers duties

A

Same duties of care and loyalty as directors

42
Q

Officer functions and how appointed

A

Function as agents of the corporation

Appointed by the board

43
Q

Indemnification of director/officer when CORPORATION SUES the director/officer

A

Never allowed: if the director/officer is liable to the corporation

Mandatory: if the director/officer wins on the merits

Permissive: if settlement, if director/officer satisfies duty of loyalty standard

44
Q

When can shareholders manage the corporation

A

Normally never but:

If small number, stock not publicly traded

45
Q

When can a shareholder be liable for act of corporation?

A

When piercing the veil:

  • only closely held corporations
  • to avoid fraud or unfairness
  • shareholder abused privilege, fair to hold the shareholder liable

Typical scenarios:

  • Alter ego (treating corporation assets as his own)
  • Undercapitalization (cannot get enough to cover to cover liabilities)
46
Q

Requirements of shareholder derivative suit

A

(1) ask if corporation could bring the suit
(2) shareholder has stock ownership during and throughout lawsuit
(3) adequately represents corp’s interests
(4) written demand on the directors that the corp bring the suit (unless FUTILE, e.g., you’re naming all the directors as defendants)

47
Q

Record date

A

The date where all shareholders on that date can vote

48
Q

Annual meeting of shareholders

A

Required every 15 months

49
Q

Special meeting of shareholders called by shareholders

A

Must be called by at least 10% of voting shares, written notice 10-60 days out, state time and place and purpose. Must conform to the purpose.

50
Q

Voting rules re: shareholders

A

Quorum = majority of voting shares present

Pass = votes in favor exceed votes against

51
Q

Order of dividend payments

A

Take the total dividend amount, then distribute accordingly:

(1) preferred stock
(2) participating stock
(3) cumulative stock
(4) common stock

52
Q

How to make fundamental corporate change

A

Board cannot do alone, must

(1) board must adopt resolution of fundamental change
(2) board gives shareholders written notice
(3) shareholders approve (with normal voting rules)
(4) deliver docs to sec of state

53
Q

Dissenting shareholder right of appraisal

A

In closely held corporations:
When there’s a fundamental corporate change, and a shareholder doesn’t approve, can force the corporation to buy his shares at fair value.

Situations: merger, transfer all assets outside ordinary course of business (i.e., corporation buys all stock of another corporation), transfer of shares in a share exchange

BUT NOT available if on major exchange with over 2000 shareholders

54
Q

Amending articles of incorporation

A

(1) board action and notice to shareholders
(2) shareholder approval
(3) deliver articles to sec of state

*no right of dissenting shareholder appraisal

55
Q

Voluntary dissolution of corporation

A

(1) board action
(2) notify sec of state
(3) corp continues through wind up period
(4) notify creditors

56
Q

Involuntary dissolution (by court order)

A

When shareholder petitions due to

(1) director abuse
(2) director deadlock that harms corp
(3) failure for two consecutive years to fill vacant board position

Especially likely in closely held corporation

When creditor petitions due to
-corp is insolvent, won’t pay a debt

57
Q

Rule 10b-5

A

Federal law prohibits fraud or misrepresentation (nondisclosure) related to purchase or sale of any security . Requirements:

(1) interstate commerce
(2) materiality
(3) scienter (intent to deceive, manipulate, etc)
(4) reliance (presumed in public cases)
(5) damages

Typical situations:

(1) misrepresentation of material info
(2) misappropriation
(3) tipping
(4) insider trading

58
Q

Section 16(b)

A

Prohibits insiders from profiting off buying and selling corporation’s stock

Usually derivative suit

Defendants: directors, officers, shareholders with at least 10% ownership

Strict liability

Look at any “profit” within any 6 month window (even if reverse the order of signs, positive/negative).

59
Q

Proxy agreements

A

11 month default cap, parties can agree differently

Generally revocable unless (1) parties agree otherwise and (2) coupled with an interest.

60
Q

Process for fundamental change to corporation

A

(1) Majority of (disinterested) board adopts a resolution
(2) Notice to shareholders for approval vote 10-60 days out
(3) Majority of voting shareholders approve
(4) Changes to articles and file with secretary of state

61
Q

Duty of controlling shareholder

A

Controlling shareholder has duty to refrain from using control for special advantage or to cause other shareholders prejudice

62
Q

How director can properly complete a transaction despite conflict of interest

A

Can be

(1) approved by board vote of all disinterested directors, or
(2) approval by disinterested shareholders

63
Q

Remedies for ultra vires act

A

Shareholder sues corp: enjoin (if equitable, protect innocent third parties)

Corporation sues bad actor: damages

State sues corporation: dissolution

64
Q

When corporation is defective, theories available

A

(1) De facto corporation: (A) applicable statute, (B) colorable, good-faith attempt to create the corporation, (C) acts of corporation.
EFFECT: treated as corporation for all purposes (except quo warranto action by the state)

(2) Corporation by estoppel: Treat corporation in one instance, cannot then deny it in another.
EFFECT: treated as corporation on case-by-case basis. Applies when “corp” is both P and D.

65
Q

Piercing the corporate veil theories

A

(1) Alter ego: (A) ignoring corporate formalities and (B) results in some injustice
(2) Undercapitalization at time of incorporation, cannot pay debts as they are due
(3) Corporation is used to perpetuate a fraud

66
Q

Shareholder suits: direct versus derivative

A

Look to who was harmed and to whom the corporation owed a duty.

Direct = breach was to the shareholder in particular

Derivative = breach was to the corporation/all shareholders, requirements:

(1) standing: ownership at time of breach and now (either actually or by operation of law)
(2) notice: for the corp to take action (but not required if futile)
(3) name: the corporation as defendant

67
Q

Derivative Action: standing requirements, timing, ways to quash, when notice not required

A

Shareholder believes t corporation harmed, but corporation does NOTHING to vindicate, the shareholder derivative action if:

(1) owned shares at time (or now operation of law) and throughout the litigation;
(2) shareholder written demand on the board to take action;
(3) the shareholder fairly and adequately represent interests of corporation.

Must wait 90 days unless:

(1) the shareholder notified earlier that the corporation will not take action; or
(2) irreparable injury will occur.

If majority of disinterested directors (but at least two) make reasonable inquiry and in good faith believe the suit is not in the corporation’s best interest, they can stop the suit.

In some states, the demand requirement will be excused if it is futile (such as where the shareholder is seeking damages from the entire board).

68
Q

Statutory safe harbor re: possible transaction conflict of interest

A

Statutory safe harbor in most states:
A transaction will not be set aside merely because a director has a personal interest in the transaction if the director can prove that:
(1) the transaction is fair to the corporation, or
(2) the material facts of the transaction were disclosed to (A) the board with disinterested director majority approval (at least 2) or (B) the shareholders with disinterested majority approval.

69
Q

Remedy in derivative suit: who gets damages?

A

The corporation

70
Q

Remedy when director usurps corp opportunity

A

The director liable to corporation for lost profits on the deal

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