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Critical Pass > Corporations > Flashcards

Corporations Flashcards

1
Q

Promoter

A

Enters into contracts securing capital to bring the corporation into existence

 Personally liable for a contract entered into pre incorporation, even after the corporation comes into existence

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2
Q

Promoter NOT liable if

A

a) Novation—the corporation and the third party contract agree to substitute the corporation for the promoter
b) Adoption—the corporation takes the benefits of the contract

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3
Q

Incorporation

A

o Must file articles of incorporation with the state

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4
Q

De Jure Corporation

A

exists when the statutory requirements for incorporation are met

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5
Q

Ultra Vires

A

o Ultra Vires Act—occurs when a corporation has a narrow purpose and acts outside the scope of that purpose

 A shareholder can file a suit to enjoin the action or take action against the officer, director, or employee who engaged in the act.

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6
Q

De Facto Corporation

A

Attempted to incorporate and ran business believing it was

incorporated –A good faith attempt to incorporate can still invoke corporate protections

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7
Q

Corporation by Estoppel

A

a 3rd party entered into a K with the corporation as though it was properly incorporated
The 3rd PARTY is ESTOPPED from asserting that the corporation was NOT formed appropriately

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8
Q

Who issues stock

A

Issuance of stock must be authorized by the board of directors

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9
Q

Valuation

A

Board of directors must determine whether the value paid for the stock is adequate

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10
Q

Par Value Stock

A

corporation assigns a minimum value to its stock
 If sold for less than the par value, the board who buys watered stock is liable for the amount
 Shareholder may also be liable if had knowledge of par value

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11
Q

Right to Inspect Corporate Records

A

o Restricted to normal business hours
o Requires five days’ notice
o Must state a proper purpose
o Right to make copies!

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12
Q

Proxy Voting

A

SHs can vote by proxy
 Proxy—written agreement to allow a person to vote on behalf of the shareholder
 Revocable unless otherwise stated (irrevocable proxy is allowed tho!)

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13
Q

Power to Amend Corporate Bylaws

A

o Can amend or repeal existing bylaws
o Can pass new bylaws
o Can limit the board of director’s ability to change the bylaws

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14
Q

Shareholder Agreements

A

SHs may enter into an agreement to vote their shares together

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15
Q

Direct Action

A

 Suing the corporation for their own benefit (i.e., to remedy a wrong personal to the shareholder)

 Usually arises when the shareholder:

(1) is denied voting rights,
(2) the board failed to declare a dividend, or
(3) the board failed to approve or deny a merger

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16
Q

Derivative Action

A

Suing on behalf of corp; recovery goes to corp

Standing—

  1. SH at the time of the bad act or omission
  2. SH during time the action
  3. fairly and adequately represents interests of corp AND
  4. Demand upon the board unless futile
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17
Q

Derivative Action: Demand on Board

A

SHs required to demand action by the board to remedy the harm UNLESS futile

• Board has 90 days to act before filing derivative action (unless demand is rejected, or irreparable harm would occur)

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18
Q

Board dismissal

A

Directors can bring motion if the action is not in the corporation’s best interest
• Can be challenged if (1) board was not disinterested or (2) not acting in good faith

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19
Q

Shareholder Liability—Piercing the Corporate Veil

A

Totality of circumstances factors:
• Undercapitalization of corp @ time of formation
• Disregard of corporate formalities (not holding annual meetings or holding votes)
• Use of corp assets as a SHs own assets
• Self-dealing
• Siphoning corporate funds or stripping assets

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20
Q

Shareholders’ Fiduciary Duty

A

“Controlling” SHs have a duty to not abuse their power to disadvantage minority SHs.
or
Controlling SH—someone who owns more than 50% of a corporation or otherwise controls voting power

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21
Q

Board Voting

A

o Quorum of directors present to hold a vote (generally a majority)
o Presence—can include phone call so long as the director can hear and participate

22
Q

Board Special Meetings

A

o Notice at least 2 days before meeting
o Notice must include the date, time, and place of meeting

o A director who did NOT receive proper notice can OBJECT
But, if the director attends the meeting and FAILS to object to lack of notice, the objection is WAIVED

23
Q

Director’s Fiduciary Duties

A

Duty of Care (Business Judgment Rule)

Duty of Loyalty
o Self-dealing & safe-harbor
o Usurping corporate opportunity

24
Q

Directors: Duty of Care

A

 Must act as an ordinarily prudent person
 Includes the duty to INVESTIGATE and ask questions
 Can rely on reports and outside experts
 Business Judgment Rule

25
Q

Business Judgment Rule

A
  • Rebuttable presumption a director reasonably believed his actions were in the best interest of the corporation.
  • Protects a director from liability for breaching the duty of care if he acted in GOOD FAITH

BJR will NOT apply if:
Not in good faith;
Not informed to the extent reasonably necessary
No timely investigation into a credible matter
Not show objectivity; had material interest in decision

26
Q

Directors: Duty of Loyalty

A

Must act in the best interest of corp
Violated if director engages in:
1. Self-dealing or
2. Usurping a corporate opportunity

ALWAYS assess whether safe harbor will apply!

27
Q

Directors: Self-Dealing

A
  • Engaging in a transaction w/ corp that benefits the director or a close family member
  • Transactions w/ another business entity that director is associated with

Remedies

  1. enjoin or rescind transaction and
  2. corp can seek damages from interested director
28
Q

Directors: Usurping a Corporate Opportunity

A
  • Taking an opportunity that the corporation would be interested in without offering it to the corporation first
  • Director must present the opportunity to the corporation first
  • If the corporation declines the opportunity, the director may take it without violating the duty of loyalty.
29
Q

Directors: Self-Dealing Safe-Harbor

A

Transaction can be protected if:
(1) directors: The interested director discloses all MATERIAL facts to the board of directors and receives approval by a majority of DISINTERESTED board of directors;

(2) SHs: The interested director discloses all material facts to SHs and receives approval by a majority of DISINTERESTED shareholders; or
(3) fair: The transaction is fair to the corporation substantively and procedurally

30
Q

Officers

A

Agents of the corporation
• An officer can act with actual express authority, actual implied authority, and apparent
authority.

31
Q

Dissolution and Winding Up

A
  • A corp may voluntarily terminate its status
  • Winding Up—corporation exists for the limited purpose of winding up its affairs and liquidating its business

Order of distribution:

1) Creditors of the corporation
2) Shareholders of stock with preferences in liquidation
3) Other remaining shareholders of stock

32
Q

Limited Liability Companies (LLCs)

A

• Tax advantages of a partnership and the limited liability of a corporation

  • Formation—requires filing articles of organization
  • Members can be individuals or corporations
  • Management—can be (1) member-managed or (2) manager-managed
  • Authority—members of a member-managed LLC have authority to bind the LLC
33
Q

LLC Liability

A

Members are generally NOT personally liable for LLC obligations
Unless: piercing the veil

34
Q

LLC Duties

A

Members owe fiduciary duties to (1) each other AND (2) LLC

Duty of loyalty
Account to LLC for any profit or benefit
Refrain from dealing w/ LLC on behalf of an adverse interest 
Refrain from competing with the LLC
*Look to safe harbor*

Duty of care
Must act reasonably
Actions are subject to BJR

35
Q

Dissociation

A

A member can withdraw at any time and for any reason

Must provide NOTICE (not necessarily written)

36
Q

Dissolution of LLC

A

(1) all members agree,
(2) if not enough members remaining, or
(3) other reason in operating agreement

Involuntary dissolution—member can ask court to dissolve
Must show a controlling member has acted oppressively and harmed member seeking dissolution

37
Q

LLC Winding Up

A

must pay off debts to creditors BEFORE distributing assets to members

38
Q

Who can restrict alienations

A

Closely Held Corps (less than 100SHs)

restrict okay to prevent outsiders from becoming involved in the corp & so initial SHs can retain control

39
Q

Types of Restraint on Alienation of Shares

A

Total prohibition on transfers
Requires company’s approval/consent
Company has an option to buy the shares
Company has a first right of refusal

40
Q

Challenging Restraint on Alienation of Shares: Test

A

Reasonability Test!

It IS reasonable to restrict transfer of shares to maintain legal status by limiting alienation (ie an S Corp).

41
Q

Requirements of Restrictions

A

Reasonable
CONSPICUOUSLY noted on stock certificate either in full or statement that says there are restrictions which are available upon request

42
Q

Enforceability of Restrictions

A

Generally, restrictions are enforceable.

But CANNOT be used against someone WITHOUT KNOWLEDGE of it (Unless restriction is certified and conspicuous)

43
Q

10b-5

A

For a PRIVATE PERSON to sue re: fraudulent purchase/sale of stock

  1. P purchased or sold the security;
  2. Transaction involves interstate commerce
  3. D engaged in fraudulent or deceptive conduct
  4. Conduct related to MATERIAL information;
  5. D acted with Scienter (INTENT)
  6. P RELIED on D’s conduct;
  7. P suffered harm.
44
Q

Scienter

A

Intent or Reckless

D is NOT liable for NEGLIGENTLY making a false or misleading stmt…Must make stmt intentionally or recklessly

45
Q

Material

A

Material if a reasonable investor would find fact IMPORTANT in deciding to purchase or sell security

46
Q

10b-5 Damages

A

Out of Pocket– difference between stock’s value and the price P paid or received
NO puntivie damages are allowed

47
Q

16(B)

A

Insider Trading
• A corporate insider forced to return short-swing profits to corp made within 6month period
• Reason for buying or selling or having non-public information is IRRELEVANT

48
Q

16(B) Elements

A
  1. Applicable Company
    • Corps w/ securities traded on a national security exchange (publicly traded) OR
    • Corps w/ assets more than $10mill & more than 500 SHs

2.Corporate insiders:
• Ds, Os, or SHs with more than 10% of any class of stock
• Os—president, vice president, secretary, treasurer, comptroller, etc.

  1. Short-swing profits: During any 6MONTH period a corporate insider who both buys and sells the corporation’s stock is liable to corp for profits made

Note: transactions made BEFORE someone is a corp insider does NOT count; if made after they are no longer it MIGHT count

49
Q

Derivative Action Recovery

A

Any recovery goes to corp

Attorney’s fees:
If litigation produces a “SUBSTANTIAL BENEFIT” to corp, P’s attorneys fees paid by corp

50
Q

Right to Inspect

A

SH right to inspect and copy corporate records if:

  1. during normal business hours
  2. written notice 5 days prior to inspection
  3. proper purpose relating to SH interest in corp

SH has burden of showing credible evidence of improper conduct AND the docs sought are ESSENTIAL to proper purpose.
The inspection may be LIMITED to specified or excerpted records.
The right to inspection continues even while a lawsuit is pending.

51
Q

Board Denial of Derivative Claim

A
  1. majority of board’s qualified DISINTERESTED directors
  2. in good faith
  3. after reasonable inquiry
  4. find maintaining action is NOT in corps best interests

Board’s failure to investigate credible allegations of corporate illegality shows a lack of good faith

52
Q

Red Flags

A

Directors breach their fiduciary duties by failing to act upon “red flags” of corporate illegality

Critical Pass (15 decks)

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