Corporations Flashcards
Promoter
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
Promoter NOT liable if
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
Incorporation
o Must file articles of incorporation with the state
De Jure Corporation
exists when the statutory requirements for incorporation are met
Ultra Vires
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.
De Facto Corporation
Attempted to incorporate and ran business believing it was
incorporated –A good faith attempt to incorporate can still invoke corporate protections
Corporation by Estoppel
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
Who issues stock
Issuance of stock must be authorized by the board of directors
Valuation
Board of directors must determine whether the value paid for the stock is adequate
Par Value Stock
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
Right to Inspect Corporate Records
o Restricted to normal business hours
o Requires five days’ notice
o Must state a proper purpose
o Right to make copies!
Proxy Voting
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!)
Power to Amend Corporate Bylaws
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
Shareholder Agreements
SHs may enter into an agreement to vote their shares together
Direct Action
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
Derivative Action
Suing on behalf of corp; recovery goes to corp
Standing—
- SH at the time of the bad act or omission
- SH during time the action
- fairly and adequately represents interests of corp AND
- Demand upon the board unless futile
Derivative Action: Demand on Board
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)
Board dismissal
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
Shareholder Liability—Piercing the Corporate Veil
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
Shareholders’ Fiduciary Duty
“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
Board Voting
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
Board Special Meetings
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
Director’s Fiduciary Duties
Duty of Care (Business Judgment Rule)
Duty of Loyalty
o Self-dealing & safe-harbor
o Usurping corporate opportunity
Directors: Duty of Care
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
Business Judgment Rule
- 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
Directors: Duty of Loyalty
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!
Directors: Self-Dealing
- 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
- enjoin or rescind transaction and
- corp can seek damages from interested director
Directors: Usurping a Corporate Opportunity
- 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.
Directors: Self-Dealing Safe-Harbor
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
Officers
Agents of the corporation
• An officer can act with actual express authority, actual implied authority, and apparent
authority.
Dissolution and Winding Up
- 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
Limited Liability Companies (LLCs)
• 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
LLC Liability
Members are generally NOT personally liable for LLC obligations
Unless: piercing the veil
LLC Duties
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
Dissociation
A member can withdraw at any time and for any reason
Must provide NOTICE (not necessarily written)
Dissolution of LLC
(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
LLC Winding Up
must pay off debts to creditors BEFORE distributing assets to members
Who can restrict alienations
Closely Held Corps (less than 100SHs)
restrict okay to prevent outsiders from becoming involved in the corp & so initial SHs can retain control
Types of Restraint on Alienation of Shares
Total prohibition on transfers
Requires company’s approval/consent
Company has an option to buy the shares
Company has a first right of refusal
Challenging Restraint on Alienation of Shares: Test
Reasonability Test!
It IS reasonable to restrict transfer of shares to maintain legal status by limiting alienation (ie an S Corp).
Requirements of Restrictions
Reasonable
CONSPICUOUSLY noted on stock certificate either in full or statement that says there are restrictions which are available upon request
Enforceability of Restrictions
Generally, restrictions are enforceable.
But CANNOT be used against someone WITHOUT KNOWLEDGE of it (Unless restriction is certified and conspicuous)
10b-5
For a PRIVATE PERSON to sue re: fraudulent purchase/sale of stock
- P purchased or sold the security;
- Transaction involves interstate commerce
- D engaged in fraudulent or deceptive conduct
- Conduct related to MATERIAL information;
- D acted with Scienter (INTENT)
- P RELIED on D’s conduct;
- P suffered harm.
Scienter
Intent or Reckless
D is NOT liable for NEGLIGENTLY making a false or misleading stmt…Must make stmt intentionally or recklessly
Material
Material if a reasonable investor would find fact IMPORTANT in deciding to purchase or sell security
10b-5 Damages
Out of Pocket– difference between stock’s value and the price P paid or received
NO puntivie damages are allowed
16(B)
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
16(B) Elements
- 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.
- 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
Derivative Action Recovery
Any recovery goes to corp
Attorney’s fees:
If litigation produces a “SUBSTANTIAL BENEFIT” to corp, P’s attorneys fees paid by corp
Right to Inspect
SH right to inspect and copy corporate records if:
- during normal business hours
- written notice 5 days prior to inspection
- 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.
Board Denial of Derivative Claim
- majority of board’s qualified DISINTERESTED directors
- in good faith
- after reasonable inquiry
- 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
Red Flags
Directors breach their fiduciary duties by failing to act upon “red flags” of corporate illegality
