Corporations Flashcards
Promoters
Persons acting on behal fo a corporation not yet formed
The corporation becomes liable on a promoter’s pre-incorporation contract when the corporation adopts the contract by either:
- Express board of directors’ resolution; OR
- Implied adoption through knowledge of contract AND acceptance of benefits
Promoter remains liable on pre-incorporation contracts until there has been a
Novation, an agreement between the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract
Who is laible if the promoter enters a pre-incorporation contract and the corporation merely adopts the contract?
Both corporation and promoter are liable at the election of the third party. NO DOUBLE RECOVERY
Promoters are of each other and the corporation. Therefore, promoters cannot make a on their dealings with the corporation
- Fiduciary
- Secret profit
If promoter acquires property before becoming a promoter and sells to corporation at a profit: profit recoverable only if sold for
MORE than FMV
If promoter acquires property after becoming a promoter and sells toa corporation at a profit:
Any profit is recovered by corporation even if resale price is FMV
Suscribers
Persons or entities who make written offers to buy stock from a corporation not yet formed
In Va, a pre-incorporation offer to buy stock is
irrevocable for 6 months.
Absolute Formation requirements
Incorporators
Incorporators merely sign and file Articles of Incorporation with Va State Corporation Commission (SCC)
Absolute Formation requirements
The Articles must include
- Authorized shares: maximum number authorized–corparoation my issue or sell less but not more unless they change articles
- Preferences: Must describe prefences and rights assigned to each class of stock
- Agent: and address of registered office (registered agent is the corporation’s official legal rep.)
- Incorporators
- Name of corporation: name must contain some indication of corporatae status
Absolute Formation requirements
By-laws
Need not be in Articles. But the corporation must adopt By-laws. The board has the power to adopt and amend the by-laws, unless the articles give the power to the shareholders.
Legal Significance of Forming a Corporation
- Illegal to do business as a corporation unless properly formed
- a corporation is a separate legal person
- Generally, shareholders are not personally liable for debst of coporation. Limited Liability, shareholder is only liable for the price of her stock.
Piercing the Corporate veil
The court will pierce the corporate veil in order to
avoid fraud or unfairness AND to render shareholders liable to 3d party victims of tort or K breach
Piercing Corporate veil
Alter ego
a controlling shareholder, alter ego, fails to observe sufficient formalities (ex: commingling funds)
Piercing Corporate veil
Under Capitalization
Corporation failed to maintain sufficent capital money to cover foreseeable liabilities (ex: dangerous business, no insurance, and mininum capitlization)
Courts are generally more willing to pierce the corporate veil for a victim than for a
- Tort
- Contract claimant
Foreign Corporations
- FCs transacting business (regular course of intrastate activity, not interstate) in Va must qualify
- A FC is one incorporate outside Va
- Qualify by getting a Certificate of Authority from the S.C.C. that requires: same information requried for articles of incorp.
- Consequences of transacting w/o qualifying:
- modes fine
- may not initiate lawsuit
Consideratoin–what must the corproation receive when it issues stock
- Par value: minimum issuance price. never less
- Acquring property with par value stock: any valid consideration can be rec’d if board values in good faith of at least par value
- No Par: means no minium issuance price, any consideration can be rec’d if deemed adequate by board (ex: treasury stock–stock previosuly issued and had been reacquired by the corporation)
Consequences for issuing par stock for less tha par value
Corporation can make an election between (not both)
- directors liable personanly for authorizing a below par issuance
- force the shareholder to pay at least par value
Preemptive Right
Right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash.
***IN VA, preemptive rights DO NOT exist UNLESS expressly granted in articles***
Directors Statutory Requirements
- Board with at least 1 member
- Stokholders have power to elect directors
- Shareholder can remove director before term expires with/without cause
Director Statutory Requirements
meetings
- unless all directors consent in writing, a meeting is required
- notice of directors’ meeting can be set in bylaws
- Proxies are not allowed. Also no voting agreements
- Quorum: majority of all directors to do business (unless a different percentage is requried in bylaws, but never fewer than 1/3 of all directors)
- Vote: majority vote of those present
Liability of Directors to their own corporation and shareholders
- Directors have duty to manage
- Protected by business judgment rule (presumption of good faith and best interests management)
- Directors, however, are fiduciaries
Director owes the Corporation a duty of care
She must act with the care that a prudent person would use with regard to her own business unless the articles limit liability for breach of duty of care.
Duty of loyalty
Directors may not receive unfair beneit unless there is a material disclosure and independent ratification
- Self dealing
- Usurping Corporate opportunities
- Ratification: directors may avoid liability by obtaining independent ratification through a majority vote of independent directors, or majority vote of share held by independent shareholders.
Indeminifaction of directors and officers
Costs, attorneys fees, fines, judgment, settlement
- Corp. may never indemnify director/officer who is held liable to their own corp.
- Corp. must ALWAYS indemnifty if they win a lawsuit against any party
- MAY indemnify if
- liability to 3parties or settlement with corp.
- D/o shows good faith with reasonable beleif that conduct was in corp.’s best interest
Director and officer indemnification
Who determines permissive idemnity?
- majority vote of independent directors; or
- majority vote of a committee of at least 2 independent directors; or
- majority vote of shares held by independed shareholders; or
- A special lawyer’s opinoin could recommend it
Requirements for a derivative suit
- contemporaneous stock ownership: through entire litigation
- Adequacy: represent
- Demand: must make demand to directors and give board 90 days to review and if rejected, alelge directors failure to review adequately
- committee of 2 or more independent directors can investigate and move for dimissal if it concludes that the derivative suit is not in best interst
Consequences of succesful derivative suit
- recovery to corp.
- shareholder gets fees and costs
- recovery against individual directors is limited by 100k or that director’s past year’s compensation
which shareholdres have right to vote at meeting?
- record shareholders as of record date
* record date is a voter eligibility cut-off set by the Board no more than 70 days before the meeting
Proxies
- Writing or electronic transmission
- authorized by record shareholder
- directed to secretary of corporation
- authorizing another to vote shares
- valid for 11 months
Proxies are revocable UNLESS
- labelled irrevocable
- couple with some other interest
Where do shareholders vote?
Annual Meeting: every corp must have annual meeting where at least onde director slot is open for election
Special Meeting: a meeting of stockholders to vote on a proposal or fundamental corporate change
Annual meeting
Special meeting
Written notice must be given to every shareholder entitled to vote and what must the contetns be
- where and when
- for special meeting, special notice–meeting’s special prupsoes must be included. Nothing else can take place
Notice requiremeent
Consequences of failure to give proper notice to all shareholders
- action taken is void unless those not getting ntoice waive their objections or actually attend the meeting
Shareholders
QUORUM
- must be quorum represented at meeting
- focuses on number of SHARES represented, not number of shareholders
- cannot be broken by leaving a meeting
- requires a majority of outstanding shares represented for any purpose unless otherwise provided in articles
Shareholders
Vote
If quorum ispresnet action is approved if the votes for it exceed votes against it, unles the Articles require higher vote
Voting Trusts
delegation of voting power, in writing to a trustee for any duration stated in the agreement which must be depositied at the corp’s principal office
Voting Agreement
An agreement in writing to all vote share as the majority of the signers of the the agreement dictate
In Va, cumulative voting does not exists UNLESS
expressly granted in articles
Directors are personally liable for unlawful dividends or distributions. BUT:
- Defense of good faith reliance on a financial officer’s representations
- 2 year SOL period
- Right of contribution among stockholder and direcotrs who were paid unlawful dividend amount
