corporations Flashcards
Incorporation
Must file articles of incorporation with the state
name, number o shares authorized to share, address of corporation registered office, name/address of each incorportor
Pre-Incorporation Liability
Corporation is generally NOT liable for pre-incorporation
Promoter is
Exception: novation where corporation substitutes promoter in the k
Adoption: corporation takes on benefits of k
Promoter
Enter into contracts securing capital to bring corporation into existence
-Personally liable for k entered into pre-incorporation EVEN AFTER corporation comes into existence
Purpose listed in Articles of Incorp.
Ultra Vires Act—
—occurs when a corporation has a narrow purpose and acts outside the
scope of that purpose
Shareholder can file suit and take action against office/employee/director who did the act
De jure corporation
statutory requirements of incorporation are met
Corporation by Estoppel
Corporation by Estoppel—a third party entered into a contract with the corporation as though it was properly incorporated; the third party is estopped from asserting that the corporation was not formed appropriately
(a party would do this so they could get past the limited liability of the corporation and go after ppl personally)
De Facto Corporation
Good faith attempt to incorporate but fail to incorporate (e.g. improperly filing articles of incorporation)
De Facto Corporation—attempted to incorporate and ran business believing it was incorporated
Issuance of Stock
issued by board of directors
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 is liable
Shareholder may also be liable if had knowledge of par value
shareholders
Shareholders are only owners and don’t manage the corporation. Shareholders are investors
Have annual meetings
notice 10-60 days in advance
Shareholder meetings
- Generally required annually
- primary purpose to elect directors
- also approve fundamental corporate changes (merger, sale of corporation)
- require a quorum; quorum exists when a majority of the shares entitled to vote are present
Proxy Voting
written agreement to allow a person to vote on behalf of the shareholder (valid 11 months)
Proxy agreements are freely revocable by the shareholder, even if
the proxy states that it is irrevocable. One exception to this rule is
a proxy coupled with an interest or legal right, which is irrevocable if the proxy expressly states as such
Bylaws
Rules and regulations adopted by Board of Directors that govern internal operations of corporation.
Shareholders have power to 1) amend/appeal existing bylaws, 2) create new bylaws, 3) limit board of direct’s ability to change bylaws
Directors Responsibilities
1) manage corporation business and affairs and 2) act as a body by voting (can’t proxy vote or vote by agreement block/group)
- need a quorum of directors to vote
Shareholder hire/ fire directors.
w/o cause (modern trend)
with cause – breach of fiduciary duty (common law)
Directors Meetings: notice
Notice required ONLY for special meetings
-@ least 2 days before
must include date, time, place (does NOT have to list purpose)
Director who didn’t receive proper notice: director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice.
Fiduciary Duties
Duty of care and loyalty
Right to sue corporation:
2 avenues
Direct action and derivative action
Duty of Care Best Judgment
Business Judgment Rule
A rebuttable presumption that 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
-party claiming breach of duty has burden to show business judg. rule doesn’t apply
Right to sue corporation: Direct Action
Suing the corporation for their own benefit (i.e., to remedy a wrong personal to the shareholder)
Usually arises when the shareholder is denied voting rights, the board failed to declare a dividend, or the board failed to approve or deny a merger
Right to sue corporation: Derivative Action
Suing on behalf of the corporation
Usually against a director or officer
Any recovery goes to the corporation
Must have:
1. Standing—any person who is a shareholder at the time of the bad act or omission (and at the time the action is filed)
- Demand upon the board—required to demand action by the board
• Board has 90 days to act before filing derivative action (unless demand is rejected,
or irreparable harm would occur)
• Futility exception—no demand is required if it would be futile
-plaintiff-shareholder may be reimbursed by the corporation if a substantial benefit to the corporation resulted from the litigation.
Piercing the Corporate Veil
Shareholders
A shareholder is not personally liable for the liabilities and obligations of a corporation. However, courts may disregard the corporate form and hold individual corporate shareholders, directors, and officers personally liable for actions taken on behalf
of the corporate entity.
- alter ego
- undercapitalization of corporation @ time of formation
- self-dealing with corporation (comingling of funds)
- Use of corporate assets as a shareholder’s own assets
Shareholders’ Fiduciary Duty
“Controlling” shareholders have a duty to not abuse their power to disadvantage minority
shareholders.
o Controlling shareholder—someone who owns more than 50% of a corporation or otherwise
controls voting power
Board of Directors:
Duty of Care
Must act as an ordinarily prudent person
a. Includes the duty to investigate and ask questions
b. Can rely on reports and outside experts
Board of Directors:
Duty of Loyalty
Safe Harbor Rules
Transaction can be protected if:
o The interested director discloses all material facts to the board of directors and
receives approval by a majority of disinterested board of directors;
o The interested director discloses all material facts to shareholders and receives
approval by a majority of disinterested shareholders; or
o The transaction is fair to the corporation substantively and procedurally
Damages for Breached duty of loyalty by director
Transaction can be enjoined or rescinded and the corporation can seek
damages from the interested director
Board of Directors:
Duty of Loyalty
Must act in the best interest of the corporation
Violated if the director engages in:
• Self-dealing; or
• Usurping a corporate opportunity
Self-Dealing
Engaging in a transaction with the corporation that benefits the director or a close
family member
• Includes transactions with another business entity that the director is associated
with
Remedy: safe Harbor rules
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.
Officers
Elected by the board of directors to run day-to-day operations
• Typical officers—president, secretary, and treasurer
• Act as agents of the corporation
duty of loyalty and care
Powers of Officers
• An officer can act with actual express authority, actual implied authority, and apparent
authority.
Amending Corp’s Articles of Incoporation
Can be amended/changed @ any time
An amendment requires a majority vote from the directors and
shareholder
Board of Directors have the authority to make general minor
amendments to the Articles without shareholder approval.
Dissolution of Corporation
A corporation 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
LLC formation - Limited Liability companies
Formation—requires filing articles of organization
• Members can be individuals or corporations
LLC liability
Members are generally not liable for LLC obligations
o Piercing the veil—members can be liable for LLC obligations
LLC Fiduciary duties
Members owe fiduciary duties to each other and to the LLC
Duty of loyalty
Must account to the LLC for any profit or benefit
Must refrain from dealing with the LLC on behalf of an adverse interest
Must refrain from competing with the LLC
Members Action (suits)
Direct Action
May bring suit against LLC or other members to enforce the member’s rights
b. Derivative Action
May bring a derivative action on behalf of the LLC against other members (or even against
themselves)
LLC Member dissolution
A member can withdraw at any time and for any reason
o Must provide notice (not necessarily written)
LLC dissolution of LLC
o Can occur if all members agree, if there are not enough members remaining, or any other
reason stated in the operating agreement
o Involuntary dissolution—a member can ask for a court order to dissolve the LLC
Must show that a controlling member has acted oppressively and harmed the member
seeking dissolution
o Winding up—must pay off debts to creditors before distributing assets to members
Members of LLC authority
Authority—members of a member-managed LLC have authority to bind the LLC
Preemptive Rights
A preemptive right is the right of an existing shareholder to maintain her percentage of ownership in the corporation by being
offered the opportunity to purchase shares of the corporation issued for cash before outsiders are permitted to purchase. Under
the RMBCA, shareholders do not enjoy preemptive rights unless such rights are explicitly granted in the corporation’s Articles of
Incorporation.
directors voting
Presence—can include phone call so long as the director can hear each other and participate
Board of Directors:
action without a meeting
The board of directors may act without holding a meeting by unanimous written consent to the action.
Shareholders:
Special Meeting
purpose of which must be specified in the notice of the meeting
Share holders can waive notice 1) attending 2) in writing
