Corporations

Question 1

Requirements to create a corporation

Answer 1

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

Question 2

Articles of incorporation are a contract between

Answer 2

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

Question 3

Articles of incorporation statement of purpose

Answer 3

Usually just “to engage in all lawful activity”

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

Question 4

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

Answer 4

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

Question 5

Types of stock

Answer 5

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.

Question 6

Authorized stock

Answer 6

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

Question 7

Issued stock

Answer 7

Issued stock: number of shares the corp. actually sells

Question 8

Outstanding stock

Answer 8

Outstanding stock: shares issued and not reacquired by corp.

Question 9

Stock information that must be included in articles of incorporation

Answer 9

Authorized stock,

number of shares per class,

information on voting rights and preferences of each class

Question 10

What law governs the internal affairs of a corp.?

Answer 10

The law of state where corporation is formed

Question 11

Double taxation

Answer 11

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

Question 12

Can a corp avoid double taxation?

Answer 12

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

Question 13

Are directors or officers liable for what corp does?

Answer 13

No

Question 14

Are shareholders liable for what corp does?

Answer 14

No

Question 15

De facto corporation doctrine

Answer 15

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

Question 16

Corporation by estoppel

Answer 16

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

Question 17

Corporation’s bylaws

Answer 17

The internal governance structures

Question 18

Who creates bylaws?

Answer 18

The directors at organizational meeting

Question 19

Who can repeal or amend the bylaws?

Answer 19

Shareholders and sometimes the board

Question 20

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

Answer 20

Articles - because it’s a contract with the state

Question 21

Definition “promoter”

Answer 21

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

Question 22

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

Answer 22

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

Question 23

Definition “foreign corporation”

Answer 23

Any corporation outside the state.

Question 24

Definition stock issuance

Answer 24

When the corporation sells its own stock

Question 25

Definition subscription re: stock issuance

Answer 25

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).

Question 26

Acceptable consideration for stock

Answer 26

Always okay: money, property, services already performed Depends on state: promissory notes and promises of future services

Question 27

Definition "par"

Answer 27

The minimum price of an issuance stock

Question 28

Definition "no par"

Answer 28

When the issuance of stock has no minimum price

Question 29

Who sets price of issuing stock?

Answer 29

The board

Question 30

Definition "treasury stock"

Answer 30

The stock the company issued and then reacquired

Question 31

Board's valuation of stock is conclusive if

Answer 31

Made in good faith

Question 32

Definition "watered stock"

Answer 32

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

Question 33

Who is liable if there is watered stock?

Answer 33

The board of directors if did it knowingly The guy who bought it Third parties who acquired knowingly

Question 34

Definition "pre-emptive right"

Answer 34

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

Question 35

Requirements to be a director

Answer 35

Must be adult natural person

Question 36

Standard for shareholders to remove a director

Answer 36

Can be with or without cause, and shareholders can replace

Question 37

Who can replace a director that the shareholders have removed?

Answer 37

The shareholders

Question 38

How can board of directors act?

Answer 38

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

Question 39

Directors: duty of care v. duty of loyalty

Answer 39

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.

Question 40

Ways for director to violate duty of loyalty

Answer 40

(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.

Question 41

Officers duties

Answer 41

Same duties of care and loyalty as directors

Question 42

Officer functions and how appointed

Answer 42

Function as agents of the corporation Appointed by the board

Question 43

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

Answer 43

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

Question 44

When can shareholders manage the corporation

Answer 44

Normally never but: If small number, stock not publicly traded

Question 45

When can a shareholder be liable for act of corporation?

Answer 45

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)

Question 46

Requirements of shareholder derivative suit

Answer 46

(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)

Question 47

Record date

Answer 47

The date where all shareholders on that date can vote

Question 48

Annual meeting of shareholders

Answer 48

Required every 15 months

Question 49

Special meeting of shareholders called by shareholders

Answer 49

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.

Question 50

Voting rules re: shareholders

Answer 50

Quorum = majority of voting shares present Pass = votes in favor exceed votes against

Question 51

Order of dividend payments

Answer 51

Take the total dividend amount, then distribute accordingly: (1) preferred stock (2) participating stock (3) cumulative stock (4) common stock

Question 52

How to make fundamental corporate change

Answer 52

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

Question 53

Dissenting shareholder right of appraisal

Answer 53

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

Question 54

Amending articles of incorporation

Answer 54

(1) board action and notice to shareholders (2) shareholder approval (3) deliver articles to sec of state *no right of dissenting shareholder appraisal

Question 55

Voluntary dissolution of corporation

Answer 55

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

Question 56

Involuntary dissolution (by court order)

Answer 56

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

Question 57

Rule 10b-5

Answer 57

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

Question 58

Section 16(b)

Answer 58

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).

Question 59

Proxy agreements

Answer 59

11 month default cap, parties can agree differently Generally revocable unless (1) parties agree otherwise and (2) coupled with an interest.

Question 60

Process for fundamental change to corporation

Answer 60

(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

Question 61

Duty of controlling shareholder

Answer 61

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

Question 62

How director can properly complete a transaction despite conflict of interest

Answer 62

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

Question 63

Remedies for ultra vires act

Answer 63

Shareholder sues corp: enjoin (if equitable, protect innocent third parties) Corporation sues bad actor: damages State sues corporation: dissolution

Question 64

When corporation is defective, theories available

Answer 64

(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.

Question 65

Piercing the corporate veil theories

Answer 65

(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

Question 66

Shareholder suits: direct versus derivative

Answer 66

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

Question 67

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

Answer 67

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).

Question 68

Statutory safe harbor re: possible transaction conflict of interest

Answer 68

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.

Question 69

Remedy in derivative suit: who gets damages?

Answer 69

The corporation

Question 70

Remedy when director usurps corp opportunity

Answer 70

The director liable to corporation for lost profits on the deal