Corporations Flashcards
What are the five fact patterns that will be tested?
- Corporate formation
- Issuance of stock
- Directors and officers
- Rights of shareholders
- Fundamental corporate changes
What are the two parties involved with corporate formation?
Promoters
- Persons acting on behalf of a corporation not yet formed
Subscribers
- People or entities that make written offers to buy stock of a corporation not yet formed
When does a corporation become liable on a promoter’s pre-incorporation contract?
Only when:
- The corporation is formed, and
- The corporation adopts the contract by either:
- Express BOD resolution
-
Implied adoption through:
- Knowledge of the contract, and
- Acceptance of its benefits
- E.g., ratification
When does a promoter become liable on his pre-incorporation contracts?
The promoter remains personally liable on pre-incorporation contracts until:
-
Novation
- An agreement between:
- The promoter,
- The corporation, and
- The contracting third party
- That the corporation will replace the promoter under the contract
- An agreement between:
Who is liable if the promoter enters into a pre-incorporation contract and the corporation is never formed?
The promoter alone is personally liable
Who is liable if the promoter enters into a pre-incorporation contract and the corporation merely adopts the contract without novation?
Both the corporation and the promoter are liable at the election of the third-party
What duties do promoters owe to corporations?
Promoters are fiduciaries of eachother and the corporation
So, promoters owe a duty of loyalty to eachother and the corporation, which means no:
-
Self-dealing
- Receiving a benefit to the corporation’s detriment
-
Usurping the corporation’s opportunity
- Taking an opportunity the corporation had
-
Secret profits
-
Making a profit at the corporation’s expense without disclosure
- E.g., Sale to corporation of promoter’s own property at profit without disclosure
-
Making a profit at the corporation’s expense without disclosure
If a promoter acquires property before becoming a promoter and sells it to the corporation at a profit, can he retain the profit?
Only if the property is sold at fair market value
If a promoter acquires property after becoming a promoter and sells it to the corporation at a profit, can he retain the profit?
No. This violates the duty of loyalty even if sold at fair market value
When can a subscriber revoke an offer to buy shares of a corporation not yet formed?
Only 6 months after making the offer.
Under Virginia corporate law, a pre-incorporation offer to buy stock is irrevocable for 6 months
Who are incorporators?
The persons who merely sign and file the articles of incorporation with the State Corporation Commission (SCC)
How do you form a corporation?
- File articles of incorporation with the SCC
- Adopt by-laws
What are by-laws?
The laws by which a corporation is governed
What must be included in the articles of incorporation?
“A PAIN”
-
Authorized shares
- __Maximum number of shares of each class of stock the corporation is authorized to issue
- This is a ceiling
- The corporation must amend the articles to raise the ceiling
-
Preferences
- __Preferences and rights assigned to each class of stock
-
Agent
- Name and address of registered office for agent to accept service of process
-
Incorporators
- __Name(s) and addresse(s)
-
Name of corporation
- __Must contain some indication of corporate status
- E.g., corporation, incorporated, Inc., Corp., etc.
- __Must contain some indication of corporate status
What is the legal significant of the formation of a corporation?
- It is illegal to do business as a corporation unless properly formed
- A corporation is a separate legal person
- Limited liability
- Generally, shareholders are not personally liable for debts of a corporation; only for the price of his stock
When will a court pierce the corporate veil?
This is a doctrine in equity, so courts are more willing to pierce the veil for a tort victim than a contract claimant
The court will pierce the corporate veil if:
- Necessary to avoid fraud or unfairness
- The corporation serves as an alter ego
- Controlling shareholder fails to observe sufficient corporate formalities (i.e., treats corporation as itself)
- __E.g., CEO commingles personal and corporate funds
- Controlling shareholder fails to observe sufficient corporate formalities (i.e., treats corporation as itself)
- The corporation is undercapitalized
- Corporation has insufficient funds to satisfy its foreseeable obligations
- __E.g., Corporation operates in a dangerous business, has no insurance, and minimal capitalization
- Corporation has insufficient funds to satisfy its foreseeable obligations
What is a foreign corporation?
A corporation incorporated outside of Virginia
What does “transacting business” mean?
The regular course of intrastate (not interstate) business activity
When can a foreign corporation transact business in Virginia?
When it obtains a certificate of authority from the SCC, including:
- The same information required by the articles of incorporation (i.e., “A PAIN”)
What are the consequences for foreign corporations that transact business in Virginia without qualifying?
- A modest fine may be imposed
- Foreign corporation may not initiate a lawsuit in Virginia state courts
- But it may be sued and file counterclaims
What must a corporation receive when it issues stock?
Par value (i.e., minimum issuance price)
When can a corporation acquire property or other consideration with par value stock?
Anytime that the BOD values the property or other consideration to be worth at least part value
What does “no par” mean?
The stock has no minimum issuance price
So, any valid consideration can be received if deemed adequate by the BOD
Note: this is the contemporary approach
What is treasury stock?
What is its par value?
Stock that was previously issued and then reacquired by the corporation
It is deemed to be no par stock
What are the consequences of issuing stock for less than par value?
The corporation can recover the difference between the issuance price and part value from:
- The BOD
- The shareholder-purchasers
What are preemptive rights?
The right of:
- An existing shareholder
- To maintain her percentage of ownership
- By buying stock whenever there is a new issuance
- Of stock for cash
What if the articles of incorporation are silent or the bar exam question does not indicate whether the articles of a corporation provide for preemptive rights?
They do not exist.
In Virginia, preemptive rights do not exist unless expressly granted in the articles of incorporation
How many members must be on the BOD of a Virginia corporation?
One
What control do shareholders have over the BOD?
Shareholders have the power to:
- Elect directors
-
Remove directors
- Even before their term expires
- Even without cause
What are the requirements regarding BOD meetings?
- BOD meetings are required unless all directors consent in writing
- Methods for notice of BOD meetings can be set in the by-laws
- Proxies are not allowed (but conference calls are okay)
- Voting agreements are not allowed
- In order to do business, there must be a quorum (i.e., a majority of all directors)
- A different percentage may be set in the bylaws
- It cannot be fewer than 1/3 of all directors
- In order to pass a resolution, there must be a majority vote of those present
- E.g., if there are 9 directors, 5 must be present and 3 must vote for a resolution to pass
What duties do directors owe to the corporation?
Directors are fiduciaries of the corporation
So, they owe the following duties to the corporation:
- Duty of care
- Duty of loyalty
- Duty to manage the corporation
In exercising their duty to manage the corporation, when will directors be protected from liability?
When the business judgment rule applies
This is a presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders
Directors will not be liable for innocent mistakes of business judgment
In exercising their duty of care to the corporation, when will directors be protected from liability?
- When they act with the care that a prudent person would use with regard to his own business
- When the articles have limited director liability for breaching their duty of care
When will a director breach his duty of loyalty to the corporation?
If the director:
- Engages in self-dealing
- Interested director transaction
- Director receives an unfair benefit to himself (or a relative or another one of his businesses) in a transaction with the corporation
- Interested director transaction
-
Usurps corporate opportunities
- Director usurps for himself an opportunity that the corporation would have pursued
In exercising their duty of loyalty to the corporation, when will a director be protected from liability?
When the director:
- Discloses the transaction to the BOD, and
- The transaction is ratified by:
- A majority vote of independent directors
- A majority vote of shares held by independent shareholders
Note: in Virginia, independence is presumed unless otherwise stated
What is a corporation prohibited from indemnifying a director?
When must a corporation indemnify a director for liability?
When may a corporation indemnify a director for liability?
A corporation can never indemnify a director who:
- Has been found liable to the corporation
A corporation must indemnify a director who:
- Has been found not liable against any party
A corporation may indemnify a director who:
- Has been found liable to third parties or settled with the corporation, and
- Shows that he acted in good faith and with the reasonable belief that his conduct was in the corporation’s best interest
Who can determine whether to grant permissive indemnity to a director?
- A majority of independent directors
- A committee of at least 2 independent directors
- A majority of shares held by independent shareholders
- A special lawyer’s opinion reccomends indemnification
What is a derivative suit?
A shareholder sues one or more directors to enforce the corporation’s cause of action
If the corporation could have brought the suit, it is a derivative suit
What are the requirements for bringing a derivative suit?
- Contemporaneous stock ownership
- Shareholder must:
- Own at least one share of stock at the time the claim arose
- Fairly and adequately represent the corporation’s best interest
- A committee of two or more independent directors can investigate and move for dismissal if it concludes that the suit is not in the best interest of the corporation
- Shareholder must:
- Demand
- Shareholder must:
- Make demand on directors that the corporation bring suit
- And either:
- Demand was rejected, or
- At least 90 days passed since demand was made
- Shareholder must:
How do you determine whether a derivative suit was in the best interests of the corporation?
A committee of two or more independent directors can investigate and move for dismissal if it concludes that the suit is not in the best interest of the corporation
What are the consquences of a successful derivative suit?
Recovery:
- Goes only the the corporation itself, and
- It limited by the greater of:
- The director’s last 12 months compensation
- $100,000
Which shareholders have a right to vote at a shareholder meeting?
Only the record shareholder as of the record date has the right to vote
What is a record shareholder?
What is the record date?
Record shareholder
- Person shown in the corporate records as the owner of stock
Record date
- A voter cut-off set at no more than 70 days before the meeting
What is a proxy?
- A writing or electronic transmission
- Authorized by a record shareholder
- Directed to the secretary of the corporation
- Authorizing another person to vote his shares
- Valid for only 11 months
When are proxies revocable?
Revocable unless:
- Labeled irrevocable, and
- Coupled with an interest
If a proxy is labeled irrevocable, can it still be revoked?
Yes, unless it is also coupled with an interest
- E.g., the recipient has an ownership interest in the shares themselves
Where do shareholders vote?
-
Annual meeting
- Every corporation must have an annual meeting at which at least 1 director position is open for election
-
Special meeting
- Meeting of shareholders to vote on:
- A proposal
- A fundamental change
- Meeting of shareholders to vote on:
What is the notice requirement for shareholder meetings?
What must the notice include?
When does notice have to be given?
The corporation must give written notice to every shareholder entitled to vote, for every meeting (annual or special)
Contents
-
Annual meeting
- Time
- Place
-
Special meeting
- Special purpose
- Nothing else can take place at the meeting that is not in the notice
- Special purpose
Timing
-
Annual meeting
- 10 - 60 days prior
-
Special meeting
- 25 - 60 days prior
*
- 25 - 60 days prior
What is the consequence of failing to give proper notice to shareholders of a shareholder meeting?
Action taken at the meeting is void unless those who did not get notice:
- Waive their objections in writing, or
- Attend the actual meeting
What are the requirements for a shareholder meeting?
There must be a quorum of shareholders represented at the meeting, which focuses on:
- Number of shares represented (not shareholders)
Once achieved, a quorum cannot be broken if a shareholder leaves a meeting
When is action approved at a shareholder meeting?
When votes for it exceed votes against it, unless:
- The articles of incorporation require a higher vote
How can multiple shareholders increase their influence on corporate policy?
By using “block voting” (i.e., always voting alike):
-
Voting trust (old)
- Formal written delegation of voting power to a voting trustee for up to 10 years
-
Voting agreement (new)
- Agreement in writing to all vote their shares as the majority of the signers of the agreement direct
What is traditional straight voting?
Whatever number of shares you have, you get that many votes for each directorship position
- E.g., if you have 1,000 shares and 9 directorships are open, you can vote 1,000 shares for your preferred director 9 times
- So if anyone has 1,001 shares, you will lose 9 times over
What is cumulative voting?
Whatever number of shares you have, you can multiply that number by the number of directorship positions open and place that many votes in a single position
- E.g., if you have 1,000 shares and 9 directorships are open, you can vote 9,000 shares for your preferred director in just one election in which the top 9 voters win
If the articles of incorporation are silent as to whether shareholders can vote cumulatively, is it allowed?
In Virginia, cumulative voting is not allowed unless granted in the articles of incorporation
When can a shareholder inspect and copy the books and records of the corporation?
Unqualified right
-
Any shareholder may inspect and copy corporate records maintained at the corporation’s principal office (e.g., articles, bylaws, minutes) if they:
- Sign a written request
- Giving 5 days advance notice
Qualified right
- A shareholder who either:
- Has been a recordholder for more than 6 months
- Owns 6% or more of the company’s stock
- Obtains court approval
- __May inspect additional corporate books and records if they:
- Sign a written notice
- Stating a proper purpose
When can dividends be declared, and by whom?
The BOD has almost unlimited discretion to declare dividends
A corporation cannot declare dividends or distributions if:
- Insolvent, or
- The dividend would render it insolvent
Insolvent means:
- Unable to pay debts as they come due, or
- Assets < liabilies
When a dividend is declared, what is the priority of distribution?
- Preferred shares get their preference
- If preferred shares are cumulative, they get any cumulative amount
- If preferred shares are participating:
- The remaining amount is shared equally between:
- Preferred shareholders, and
- Common shareholders
- The remaining amount is shared equally between:
- If preferred shares are not participating:
- The remaining amount is shared equally between:
- Common shareholders
- The remaining amount is shared equally between:
Who is liable for unlawful dividends or distributions?
Directors are personally liable, but they have:
- A defense based on a g__ood faith reliance on a financial officer’s representations
- A right of contributions against:
- Co-directors
- Shareholder-recipients of the unlawful dividend
How can shareholders eliminate the formalities associated with a corporation?
- Must be a non-public corporation (i.e., not listed on a national exchange or traded in a regular market)
- Must have a unanimous shareholder agreement in:
- Articles of incorporation, or
- Bylaws
- Valid for 10 years, unless otherwise indicated
What are the consequences of eliminating the formalities of a corporation?
- Court will not pierce the veil to render shareholders liable even if they fail to observe the formalities
- Likely subchapter-S corporation status
- S-Corps are:
- Treated as a partnership for tax purposes
- Limits:
- No more than 100 owners of stock
- No more than 1 class of stock
- S-Corps are:
What are the benefits of a limited liability company (LLC)?
- Limited liability of a corporation
- Beneficial tax status of a partnership
This is the best business structure if asked
What are the formation requirements for an LLC?
Must:
- File articles of incorporation with SCC
May:
- Adopt an operating agreement
How is control shared in an LLC?
Owner-members may:
- Manage the corporation, or
- Delegate to a team of managers with the same rights and liabilities as a BOD
Is the life of an LLC indefinite?
No. An LLC dissolves:
- Upon the unanimous consent of members, or
- As provided for in the articles or operating agreement
Are interests in an LLC transferrable?
A full membership interest may not be transferred without:
- Majority consent of members, or
- As provided in the articles or operating agreement
What do LLCs equal?
Limited liability
Limited life
Limited liquidity
Limited tax
How is a Virginia Business Trust formed?
- File article of trust that creates:
- A managing trustee, and
- Beneficial owners
Does the Virginia Business Trust offer limited liability?
Yes. The beneficial owners can manage the trust without incurring liability.
Is the life of a Virginia Business Trust indefinite?
Yes. A Virginia Business Trust can go on forever for any lawful business
What are “fundamental changes”?
- Merger (A becomes B)
- Consolidation (A and B become C)
- Share exchange (A and B exchange shares)
- Dissolution (A dissolves)
- Fundamental amendment of the articles (e.g., increasing authorized shares)
- Sale (not purchase) of substantiall all the assets
What are the necessary steps for a fundamental change?
- Resolution by BOD at a valid meeting
- Notice of a special meeting (25 - 60 days in advance)
-
Approval by more than 2/3 of all shares entitled to vote
- Articles may provide for different percentage, but not less than a majority
- Possibility of dissenting shareholder right of appraisal for:
- Merger
- Consolidation
- Share exchange
- Sale of substantially all assets
- File notice with SCC
What is the dissenting shareholder’s right of appraisal?
What is the process?
The right of a shareholder to force the corporation to buy his shares at fair value
Process:
- Shareholder perfects the right by:
- Before shareholder vote, file notice in writing of intent to object and demand payment
- At shareholder vote, do not vote in favor (i.e., either object or abstain)
- After shareholder vote, make timely demand in writing to be bought out
What happens if a dissenting shareholder and the corporation cannot agree on the fair value of the shares?
In Virginia, the court will adopt an expert appraiser to value the shares, and it is binding
What is the process for making ministerial amendments to the articles of incorporation (e.g., the agent’s address)?
The BOD on its own can effectuate these
How many shareholder votes are required to effectuate a fundamental amendment to the articles of incorporation?
If the amendment does not adversely affect a particular class:
- More than 2/3 of the shares of the entire corporation
If the amendment does adversely affect a particular class:
- More than 2/3 of the shares of the entire corporation, and
- More than 2/3 of the shares of the particular class
Is the sale of all or substantially all of the assets of a corporation a fundamental corporate change?
Only for the selling corporation
