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Corporations Flashcards

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1
Q

A corporation is owned by its

A

shareholders

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2
Q

The group in charge of the management of the corporation is

A

the Board of Directors

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3
Q

Members of the Board of Directors are elected by the

A

shareholders

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4
Q

The Board appoints people to carry out its policy. Who are they?

A

Officers

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5
Q

To form a corporation, we need…

A

a person, a paper, and an act

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6
Q

Person

A

Incorporator. Must have one or more who executes the articles and delivers them to the secretary of state.

A person or entity may serve as incorporator.

Incorporator need not be a citizen of the state of incorporation.

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7
Q

Paper

A

Articles of Incorporation

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8
Q

Articles of Incorporation: Required Contents

A

(1) Name of corporation
(2) Name and address of each incorporator
(3) Registered agent and street address of the registered office (in this state)
(4) Information regarding stock

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9
Q

Articles of Incorporation: Required Contents

Name of corporation

A

Must include “magic words” or abbreviation

Corp., company, inc., or limited

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10
Q

Articles of Incorporation: Required Contents

Registered agent and street address of the registered office (in this state)

A

Registered agent is the company’s legal representative, so she can receive service of process for the corporation.

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11
Q

Articles of Incorporation: Required Contents

Information regarding stock

A

Authorized stock: max number of shares the corporation can issue (sell)

If the company will have different classes of stock, many states require the articles state the number of shares per class, the voting rights and preferences of each class of stock.

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12
Q

Not required in articles

A

Initial directors and addresses

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13
Q

Act

A

Incorporators have notarized forms delivered to the Secretary of State and pay the required filing fees.

Once the Secretary of State’s office accepts the articles for filing, the corporation is formed de jure

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14
Q

Organizational Meeting

A

If initial directors were named in the articles, directors hold the “organizational meeting”

If initial directors NOT named in the articles, incorporators hold the organizational meeting, where they elect the initial directors

At the meeting, the board of directors (or incorporators) must “complete organization of the corporation– appoint officers and adopt bylaws

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15
Q

Bylaws

A

Internal document. Comprise operating manual with things like setting record dates, methods of giving notice, etc.

Not filed with state; internal

If in conflict with articles, articles govern

Can be amended/repealed/new ones adopted by SHHs or BoD

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16
Q

Internal Affairs Rule

A

Law of the state of incorporation governs internal affairs– even if they only do business in another state

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17
Q

Entity Status

A

Corporation is a legal person.

Can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities, make contributions to charity

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18
Q

B-Corp

A

Benefit corporation is one formed for profit AND ALSO to pursue some benefit to a broader social-policy cause. Things work as with a regular corporation, but articles must say it’s a benefit corporation.

Files an annual benefit report assessing how it pursued its stated social mission.

Decision-makers consider not just impact of decision on shareholders, but on the broader community or environment.

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19
Q

S-Corp

A

Have no more than 100 shareholders, all of whom are human US citizens or residents; one class of stock and it is not publicly traded

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20
Q

Corporate Taxation

A

Corporation pays income tax on its profits. In addition, SHHs are taxed on distributions to them, so there’s double taxation.

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21
Q

Limited Liability

A

If the corporation incurs a debt, commits a tort, or breaches a contract, shareholders are not personally liable for that debt.

Shareholders generally liable only to pay for their stock, not for corporate debts.

Directors and officers are not vicariously liable for corporate debts

Corporation itself is liable.

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22
Q

Defective Corporation

A

Proprietors thought they formed a corporation, but failed to do so– they are personally liable for business debts because they have formed a partnership and partners are liable for business debts

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23
Q

De Facto Corporation (DFC): 3 Requirements

A

(1) There is a relevant incorporation statute (there is!)
(2) The parties made a good faith, colorable attempt to comply with it, and
(3) there has been some exercise of corporate privileges (they are acting as though they thought it was a corporation

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24
Q

De Facto Corporation (DFC): Effects

A

If this applies, business is treated as corporation for all purpose except in an action by the state (such an action would be quo warranto)

Abolished in many states

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25
Q

Incorporation Documents Lost in the Mail

A

Shareholders personally liable on the contract, unless court applies DFC

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26
Q

Corporation by Estoppel

A

Someone who treats a business as a corporation may be estopped from denying that it is a corporation

Can also prevent the improperly-formed corporation from avoiding liability by saying it was not properly formed

Only applies in CONTRACT, NOT TORT cases

Abolished in many states

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27
Q

Pre-Incorporation Contracts

A

Corporation is liable on a pre-incorporation contract ONLY if it adopts the contract.

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28
Q

Promoter

A

Person acting on behalf of a corporation not yet formed. She might enter a contract on behalf of a corporation not yet formed

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29
Q

Adoption of a Pre-Incorporation Contract

A

Can be express or implied

Express: board takes an action adopting the contract.

Implied: corp accepts a benefit of the contract.

Makes the corporation liable too, but does not relieve the promoter.

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30
Q

Promoter’s Liability

A

Unless the contract clearly says otherwise, promoter IS LIABLE on pre-incorporation contracts until there is a NOVATION

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31
Q

Novation

A

Agreement of the promoter, the corporation, and other contracting party that the corporation replaces the promoter under the contract

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32
Q

Foreign Corporations

A

Foreign corporations transacting business in this state must qualify and pay prescribed fees.

Anything outside State: foreign

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33
Q

Transacting business

A

the regular course of intrastate (not interstate) business activity.

doesn’t include occasional or sporadic activity in this state, and not simply owning property

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34
Q

Foreign Corporation: Qualification

A

qualifies by getting a certificate of authority from the Secretary of State.

Gives information from its articles and proves good standing in its home state.

Foreign corporation must also appoint a registered agent and maintain a registered office in this state

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35
Q

What happens if a foreign corporation transacts business without qualifying?

A

(1) civil fine
(2) corp cannot assert a claim in state

But corporation can sue and defend in this state.

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36
Q

Once corporation qualifies and pays back fees and fines, can it assert a claim here?

A

Yes

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37
Q

Issuance of Stock: Background

A

To start and operate a corporation, need capital. Corporation can either borrow the money or raise it by selling stock (or both).

Corporation will “issue” a “security” to the person.

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38
Q

Debt securities

A

Corporation borrows money from X and agrees to repay her with interest.

Usually called bonds

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39
Q

Person holding a bond is

A

A creditor, NOT an owner of a corporation

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40
Q

Equity securities

A

Corporation sells an ownership interest to X.

Equity securities are called stock.

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41
Q

Person holding stock (shareholder, stockholder)

A

Owner, not a creditor

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42
Q

What is an Issuance of Stock

A

When corporation sells its own stock.

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43
Q

Subscriptions

A

Written offers to buy stock from corporation

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44
Q

Pre-incorporation subscriptions

A

Irrevocable for 6 months unless it says otherwise or all subscribers agree to let you revoke

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45
Q

Is post-incorporation subscription revocable?

A

yes until accepted by corporation

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46
Q

When are the corporation and the subscriber obligated under a subscription agreement?

A

When the board of directors accepts the offer

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47
Q

What must the corporation receive when it issues stock?

A

Consideration

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48
Q

Form of consideration

A

stock (or an option to buy stock) may be issued for “any tangible or intangible property or benefit to the corporation”

Includes money (cash or check), property, services already performed for the corporation, and discharge of a debt.

Includes promissory notes to the corporation, future services to the corporation.

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49
Q

Can corporation give employees options to buy stock as payment for services?

A

Yes

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50
Q

Par

A

Minimum issuance price (can get more)

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51
Q

No par

A

no minimum issuance price, board can have stock issued for any price that it sets

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52
Q

Treasury Stock

A

Stock the company issued and then reacquired.

Considered authorized, and the corporation can then resell it. If it does, the board sets any issuance price it wants.

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53
Q

If corporation issues stock in exchange for property or past services, who determines the value of the property or services?

A

the Board of Directors.

This valuation is conclusive if made in good faith.

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54
Q

Watered stock

A

If stock is issued (issuance by the corporation!!!!) for less than par, the deficit is called “water”

The directors are liable if they knowingly authorized the issuance

The purchaser of the stock is also liable. There is no defense, he is charged with notice of the par value.

If purchaser transfers the stock to a third party, third party is not liable if she acted in good faith (she did not know about the water)

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55
Q

Preemptive Right

A

Right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new ISSUANCE of stock for money (cash or its equivalent, like a check)

If articles are silent, no preemptive rights.

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56
Q

Statutory Requirements: Number of Directors

A

1 or more

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57
Q

Statutory Requirements: Election of Directors

A

Initial directors may be named in the articles.

If not, they are elected by the incorporators at the organizational meeting.

After that, elected by shareholders.

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58
Q

Statutory Requirements: Election of Board

A

Entire board is elected each year unless there is a “staggered” (“classified”) board.

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59
Q

Staggered board

A

Divided into half or thirds, with one half or one third elected each year/

Usually set in the articles

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60
Q

Removal of Directors Before Terms Expire

A

Shareholders can remove a director with or without cause

In some states, if there is a staggered board, shareholders can remove a director only for cause

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61
Q

Vacancies on Board of Directors

A

Generally filled by board of shareholders.

But if shareholders created the vacancy by removing a director, the shareholders generally must select the replacement

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62
Q

Is an individual director an agent of a corporation?

A

No.

Board of directors must act as a group.

Individual directors have no authority to speak for or bind the corporation.

Directors must act as a group, even if there is only one director.

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63
Q

Board of Directors must act as a group: Requirements

A

(1) unanimous agreement in writing (email is ok, separate documents are ok)

(2) at a meeting (which must satisfy quorum and voting requirements)
- Conference call counts (simultaneous oral communication so each can hear all others)
- Individual conversations without a meeting or unanimous written agreement void unless ratified by a valid act

(3) if board meeting, method for giving notice is set in the bylaws

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64
Q

Board meetings: Notice

Regular Meetings

A

No notice required

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65
Q

Board meetings: Notice

Special Meetings

A

Unless bylaws say otherwise, the corporation must give at least 2 days notice of date, time, and place (but not purpose)

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66
Q

Board meetings: Notice

Failure to Give Required Notice

A

Means that whatever happened at the meeting is voidable (maybe void) unless directors not notified waive the notice defect.

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67
Q

Board meetings: Notice

Failure to Give Required Notice– Waiver

A

(1) in writing anytime

(2) by attending the meeting without objecting at the outset of the meeting

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68
Q

Board of Directors: Proxies and Voting Agreements

A

Directors cannot give proxies or enter voting agreements for how they will vote as directors; BoD owe corporation nondelegable fiduciary duties.

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69
Q

Quorum for Meetings of the Board

A

For any meeting of the board, need quorum.

Unless bylaws say otherwise, quorum is a majority of all directors.

Without quorum, board cannot act.

Of quorum present, passing a resolution requires only a majority vote of those present.

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70
Q

Quorum Broken

A

Quorum can be lost (“broken” if people leave; once quorum is no longe present, Board cannot take an act at that meeting

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71
Q

Role of the Board of Directors

A

(1) board manages corporation: sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to SHHs, etc.
(2) Board can delegate to a committee of one or more directors, which can recommend things to the full board for action

72
Q

Committee of the Board CANNOT

A

(1) declare declarations
(2) fill a board vacancy
(3) recommend a fundamental change to shareholders

73
Q

Fiduciary Duties Owed to the Corporation: Directors

A

Director must discharge her duties in good faith and with the reasonable believe that her actions are in the best interest of the corporation (duty of loyalty). Must use the care that a prudent person in like position would reasonably believe appropriate under the circumstances (duty of care)

74
Q

Duty of loyalty

A

Director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation

75
Q

Duty of care

A

Director must use the care that a prudent person in like position would reasonably believe appropriate under the circumstances

76
Q

Duty of care Violations

A

Burden is on the plaintiff

77
Q

Nonfeasance

A

director does nothing– he’s lazy

A person in like position would do some work. this guy did nothing, so he breached the standard of care.

only liable if this breach has caused a loss to the corporation

78
Q

Misfeasance

A

board makes a decision that hurts the business.

director’s action caused a loss to the corporation, so causation is clear. But, a director is not liable if she meetings the business judgment rule

79
Q

Business Judgment Rule

A

presumption that when the board took the act, it did appropriate homework. Burden is on the plaintiff to show that the board either did not do appropriate homework and did something galactically stupid.

Court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis.

80
Q

Business Judgment Rule: Duty of Loyalty

A

BJR does not apply in duty of loyalty cases; it can never apply when the fiduciary has a conflict of interest

81
Q

Duty of Loyalty: Burden

A

Burden is on the defendant

82
Q

Duty of Loyalty: Self-dealing

A

Interested director transactions.

Any deal between the corporation and one of its directors (or a close relative of a director) or another business of the directors.

Interested director transaction will be set aside (or director liable in damages) UNLESS director shows either

(1) the deal was fair to the corporation when entered OR
(2) her interest and the relevant facts were disclosed or known and the deal was approved by either
- the majority (at least 2) disinterested directors OR
- majority of disinterested shares

Some courts may also require a showing of fairness

83
Q

Special Quorum Rule: Duty of Loyalty

A

quorum is a majority (at least two) of disinterested directors.

84
Q

Can directors set their own compensation as directors or officers?

A

Yes, but it must be reasonable and in good faith.

If it is excessive, they are wasting corporate assets and breaching the duty of loyalty.

85
Q

Duty of Loyalty: Competing Ventures

A

Director cannot compete directly with her corporation.

Remedy: corporation gets a constructive trust on profits from competing venture

86
Q

Duty of Loyalty: Corporate Opportunity (Expectancy)

A

A duty cannot USURP a corporate opportunity.

That means a director cannot take it until he

(1) tells the board about it and
(2) waits for the board to reject the opportunity.

87
Q

Corporate Opportunity

A
  • Something in the corporation’s business line
  • Something company had interest/expectancy in
  • Something director found on company time with company resources
88
Q

Is company’s financial inability to pay for corporate opportunity a defense?

A

Probably not.

89
Q

Corporate Opportunity: Remedy

A

Director must sell it to the corporation at his cost if it’s still in his possession.

If sold at a profit. the corporation gets the profit (constructive trust)

90
Q

Can corporation make a loan to a director?

A

yes, if reasonably expected to benefit corporation

91
Q

Directors Liabiliities

A

Directors may be liable to the corporation for improper distributions, improper loans, ultra vires acts (making the company do things that it has no power to do) and for breaches of fiduciary duties

92
Q

Which Directors May be Liable?

A

A director is presumed to concur with board action unless her dissent or abstention is noted in writing in corporate records.

In writing: (1) in the minutes or (2) delivered in writing to the presiding officers at the meeting or (3) written dissent to the corporation immediately after the meeting. Oral dissent is not effective by itself.

93
Q

Directors Liability: Dissent

A

In writing:

(1) in the minutes or
(2) delivered in writing to the presiding officers at the meeting or
(3) written dissent to the corporation immediately after the meeting.

Oral dissent is not effective by itself.

Director cannot dissent if she voted for the resolution at the meeting

94
Q

Directors Liability: Dissent

Exceptions

A

Not liable if you were absent from the meeting

Good faith reliance on information (including financial information) presented by an officer, employee, or committee (of which the director relying was not a member) or professional reasonably believed competent. Reliance must be in good faith (no good if you knew the person giving information was a bozo)

95
Q

Officers: status

A

agents of the corporation.

Corporation is the principal and the officer is the agent.

Whether officer can bind the corporation is determined by whether she has agency authority to do so (like actual or apparent authority)

Some positions may have inherent authority

96
Q

Officers: Positions

A

Corporations were traditionally required to have a president, a secretary and a treasurer. Can have others.

One person can hold multiple offices simultaneously

97
Q

Selection and removal of officers

A

Officers are selected by and removed by the board, which also sets officer compensation

Removal of officers before end of term may open corporation to liability for breach of contract damages

Shareholders do NOT hire and fire officers

98
Q

Corporation CANNOT indemnify

A

a director or officer who was held liable to the corporation or to have received an improper benefit.

Must be a holding, not just an accusation

99
Q

Corporation MUST indemnify

A

a director or officer who prevailed in the case on the merits or otherwise.

in some states she must win the entire case, in others she is entitled to indemnification to the extent she wins the case

100
Q

Corporation MAY indemnify (“permissive indemnification”)

A

a director or officer’s litigation expenses if she showed that she acted in good faith with reasonable belief that she acted in the company’s best interest. This is the duty of loyalty standard.

101
Q

Eligibility for permissive indemnification determined by

A

disinterested directors, disinterested shares, or independent legal counsel

102
Q

Court may order reimbursement when director or officer sued if

A

it is justified in view of all circumstances.

If she was held liable to the corporation, this is limited to costs and attorneys’ fees (cannot include judgment)

103
Q

Articles and Liability

A

Articles can eliminate director (and in some states, officer) liability to the corporation for damages, but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit (ONLY DUTY OF CARE CASES)

104
Q

Close Corporation: Shareholders Role

A

In a close corporation, shareholders can run the corporation directly

105
Q

Close Corporation: Characteristics

A

Few shareholders

stock not publicly traded

can set up management with board of directors and run it like a regular corporation, or can eliminate the board and have shareholders run the business or appoint a manager, etc.

106
Q

Shareholder Management Agreement

A

Sets up alternative management for the close corporation.

(1) in the articles AND approved by ALL shareholders OR
(2) by unanimous written shareholder agreement

Either way, should be conspicuously noted on the front and back of the stock certificates. Failure to do so does not affect validity.

Duties of care and loyalty owed by whoever manages

107
Q

Special Fiduciary Duty in Close Corporations

A

In many courts, courts impose a fiduciary duty on shareholders owed to other shareholders (a duty of utmost good faith)

108
Q

Close Corporation: Oppression of minority Shareholders

A

Can sue controlling shareholders who oppress them for breach of this fiduciary duty.

Ex: deny minority any voice in corporate affairs, fire them from employment, refuse to declare dividends, refuse to buy the minority’s stock.

109
Q

Why do courts let minority shareholders sue for oppression in a close corporation?

A

(1) this oppression thwarts her legitimate goals for investing
(2) she has no way out

110
Q

Professional Corporation

A

licensed professionals may incorporate as a professional corporation or a professional association.

Name must have one of those phrases or (P.C. or P.A.)

Articles must state that the purpose is to practice in a particular profession

May employ non-professionals , but not to practice profession

111
Q

Professional Corporation: Liability

A

Generally liable for their malpractice.

Shareholders are generally not liable for corporate obligations or for other professionals malpractice

112
Q

Can Shareholders be Held Liable for Corporate Debts?

A

No, because the corporation is liable for what it does.

113
Q

Piercing the Corporate Veil

A

Only happens in close corporations, to hold shareholders personally liable.

  1. they must have abused the privilege of incorporating and
  2. fairness must require holding them liable

Avoid fraud or unfairness by shareholders in a close corporation. Sloppy administration is not enough for PCV.

Allows for imposition of liability on a shareholder, which might be another corporation.

114
Q

PCV: Alter Ego

A

Identity of interests.

Did shareholder abuse corporation: X treats corporate assets as its own.

Why would it be unfair to have limited liability?

Only specific shareholder is liable

115
Q

PCV: Undercapitalization

A

shareholders failed to invest enough to cover prospective liabilities.

courts may be willing to PCV for a tort victim than for a contract claimant

116
Q

Derivative Suit

A

Shareholder is suing to enforce the corporation’s claim, not her own personal claim.

A case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecutor it for the corporation.

Could the corporation have brought this suit? If yes, derivative

Suits for breaching the duty of loyalty or care is always derivative because these are duties owed to the corporation

117
Q

Is shareholder plaintiff wins the derivative suit, who gets the money from the judgment?

A

Corporation.

Shareholder plaintiff recovers costs and attorney’s fees, usually from judgement won for the corporation.

118
Q

If shareholder plaintiff loses the derivative suit, does she recover?

A

No, not even costs and attorney’s fees

Will be liable to defendant he sued for defendant’s attorney’s fees if he sued without reasonable cause.

Other shareholders cannot later sue the defendants on the same transaction

119
Q

Requirements for bringing shareholder derivative suit

A

(1) stock ownership when claim arose and throughout suit, at time when claim arose or have gotten it by operation of law (inheritance, divorce decree) from someone who did own it then
(2) must provide adequate representation of corporation’s interest

(3) must make written demand on corporation (usually that means the board) that the corporation bring suit.
- in some states you must always make this demand, and cannot sue until 90 days after making the demand. In other states, not required to make this demand if demand would be futile (ex: present directors will be defendants in the case)

(4) corporation is joined as defendant.
(5) parties can only settle or dismiss with court approval. court may give notice to shareholders and get their input on whether to settle or dismiss

120
Q

Derivative Suit: Corporation moves to dismiss

A

Corporation may move dismiss based upon independent investigation that concluded that suit is not in the corporation’s best interest (e.g. low chance of success or expense of the case would exceed recovery the corporation would win).

Investigation must be made by independent directors or a court appointed panel of one or more independent persons (usually “special litigation committee” of independent directors)

121
Q

Derivative Suit: Corporation moves to dismiss

Court finds…

A

(1) those recommending dismissal were truly independent and

(2) they made a reasonable investigation, court will dismiss in most states.

122
Q

Oustanding Stock

A

Shares the company issued and has not reacquired

123
Q

Voting: Outstanding Shares

A

Each outstanding share gets one vote, BUT you must be the “record shareholder” of the outstanding stock as of the “record date” to vote

124
Q

Record Shareholder

A

person shown as the owner in corporate records.

Record date is the voter eligibility cut-off

125
Q

Exceptions to general rule that record owner on record date votes

A

(1) corporation reacquires stock before record date, so it is the owner of this “treasury stock” as of record date. Nobody votes, it is not outstanding on record date
(2) Death of shareholder: executor can vote the shares even though not the record holder on the record date
(3) voting by proxy

126
Q

Proxy

A

A writing (fax and email ok) signed by the record shareholder (email ok if can identify the sender) directed to the secretary of the corporation authorizing another member to vote the shares.

Good for 11 months unless it says otherwise.

127
Q

How to revoke a proxy

A

(1) in writing to corporate secretary
(2) by attending meeting and voting

Can revoke a proxy even though it states that is is irrevocable.

128
Q

Irrevocable Proxy

A

must be a “proxy coupled with an interest”

Requires

(1) proxy says its irrevocable and
(2) proxy-holder has some interest in the shares other than voting

129
Q

Voting Trust Requirements

A

(1) written trust agreement, controlling how shares will be voted
(2) copy to the corporation
(3) transfer legal title to the voting trustee
(4) original shareholder receive trust certificates and retain all shareholder rights except for voting

10 year maximum.

130
Q

Requirements for Voting AGreement

A

in writing and signed.

Increasingly, these are specifically enforceable. In states where specific enforcement granted, there is no need to use the voting trust.

131
Q

Where do shareholders vote?

A

Usually at meeting, but can act by unanimous written consent signed by holders of all voting shares (email OK)

If they have a meeting, it need not be held in the state of incorporation

132
Q

Annual Shareholder Meeting

A

If no annual meeting held within 15 months, shareholder can petition the court to order one.

Required.

Elect directors.

133
Q

Special Meeting can be called by

A

(1) the board
(2) the president
(3) the holders of at least 10% of the outstanding shares or
(4) anyone else authorized in the bylaws

Must be for something shareholders can do (i.e. cannot call a special shareholder meeting to remove an officer, because shareholders do not remove officers)

134
Q

Shareholder Meetings: Notice Requirement

A

Must give written notice (fax or email ok) to every shareholder entitled to vote.

Must be delivered between 10-60 days before the meeting.

Notice must state date, time, and place of meeting.

For special meetings, must state purpose– can only do the special purpose at the meeting.

135
Q

Consequence of Failure to Give Proper Notice to Shareholders Before Shareholder Meeting

A

Whatever action was taken at meeting is voidable (maybe void) unless those not sent notice waive the notice defect.

136
Q

Consequence of Failure to Give Proper Notice to Shareholders Before Shareholder Meeting

Waiver

A

(1) Express– in writing and signed anytime (fax and email ok)
(2) implied– attend the meeting without objecting at the outset.

137
Q

What do shareholders generally vote on?

A

(1) to elect directors
(2) to remove directors
(3) on fundamental corporate changes

May vote on other things if the board asks

138
Q

Shareholders: Quorum

A

every time the shareholders vote, must have a quorum represented at the meeting.

determination of a quorum focuses on the number of SHARES represented, not on the number of shareholders.

general rule: quorum requires a majority of outstanding shares (NOT SHAREHOLDERS!)

Quorum not lost if people leave the meeting

139
Q

Shareholder Vote: To Elect a Director

A

Plurality

The person who gets more votes for the seat on the board than anyone else

140
Q

Shareholder Vote: To Remove a Director

A

Traditionally needed majority of shares entitled to vote

Increasingly, treat this the same as “other matters”– majority of shares that ACTUALLY VOTE on the issue

141
Q

Shareholder Vote: Other matters

A

majority of the shares that ACTUALLY VOTE on the issue

142
Q

Cumulative Voting

A

Usually only in close corporations, gives smaller shareholders a better chance of electing someone to the board

Available ONLY when shareholders elect directors

Don’t vote for each seat individually– have one at-large election. Top two finishers are elected to the board.

Must be in articles

143
Q

Cumulative Voting: determining voting power

A

Multiply the number of shares times number of directors to be elected

144
Q

Straight Voting

A

separate election for each seat on the board being elected.

145
Q

Stock transfer restrictions

A

OK if they are reasonable: not an undue restraint on alienation

If valid, can be enforced against transferee if

(1) restriction is conspicuously noted on the stock certificate OR
(2) transferee had actual notice of the restriction

146
Q

Right of Shareholder (Personally or by Agent) to inspect (and copy) the books or records of the corporation

A

Any shareholder can demand access

147
Q

Right of Shareholder (Personally or by Agent) to inspect (and copy) the books or records of the corporation

Procedure for non-controversial things

A

shareholder makes a written demand at least 5 business days in advance.

Need not state a proper purpose

Include: articles, bylaws, minutes of shareholder’s meetings for the past 3 years, names and addresses of current directors and officers, most recent annual report of corporation

148
Q

Right of Shareholder (Personally or by Agent) to inspect (and copy) the books or records of the corporation

Procedure for more controversial things

A

Same as procedure for non-controversial things, but must state a proper purpose related to the demand (related to your interest as a SHH)

Ex: excerpts of minutes of BOARD MEETINGS, accounting records, record of shareholders

149
Q

Right of Shareholder (Personally or by Agent) to inspect (and copy) the books or records of the corporation

Corporation Fails to Allow Proper Inspection

A

Shareholder can seek a corder order.

If she wins– can recover costs and attorney’s fees incurred in making the motion

150
Q

Distributions

A

Payments by the corporation to the shareholders.

At board’s discretion.

151
Q

3 Different Types of Distributions

A

(1) dividends
(2) to repurchase shareholder’s stock
(3) redemption (a forced sale to corporation at price set in articles)

152
Q

When Does Shareholder Have Right to Dividend or Other Distribution?

A

When the board declares it.

Very difficult to win a case to force declaration of distribution. Plaintiff must make a VERY strong showing of abuse of discretion. (Ex: corporation consistently makes profits and the board refuses to declare a dividend while paying themselves a bonus).

This is a direct suit.

153
Q

Which shareholders get dividends?

A

Pay preferred stock first, then pay common stock

154
Q

Cumulative dividend

A

Accrues year to year. Means the corporation owes the number of years times the dividend

155
Q

For any distribution, which funds can be used?

A

Traditional view:
Earned surplus
Stated capital
Capital surplus

Modern view: doesn’t look at funds; says corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent.

156
Q

Earned surplus

A

Generated by business activity.

Consists of all earnings minus all losses minus distributions previously paid. Proper fund for paying distributions

157
Q

Stated Capital

A

Generated by issuing stock (so is capital surplus). When corporation issues stock, it allocates the proceeds between stated capital and capital surplus.

Can NEVER be used for distribution.

On par issuance, par value goes to stated capital. Any excess over par goes to capital surplus.

On no-par issuance, board allocates consideration between stated capital and capital surplus.

158
Q

Capital Surplus

A

generated by issuing stock

payments in excess of par plus amounts allocated in no-par issuance

can be used for distributions if we inform the shareholders

159
Q

Insolvent

A

corporation is unable to pay its debts as they come due OR

total assets are less than total liabilities. liabilities include preferential liquidation rights

160
Q

Liability for improper distributions

A

Directors are jointly and severally liable for improper distributions.

Remember the directors’ good faith reliance defense. .

Shareholders are personally liable ONLY if they knew the distribution was improper when they received it.

161
Q

Characteristics of Fundamental Corporate Change

A

Extraordinary, so board generally cannot do them alone.

  1. Amendment of articles
  2. Merge or consolidate into another company
  3. Transfer substantially all assets (or having stock acquired in “share exchange”)
  4. Convert to another form of business
  5. Dissolve
162
Q

To do a Fundamental Corporate Change, need

A

(1) board action adopting a resolution of fundamental change
(2) board submits proposal to shareholders with written notice
(3) shareholder approval: majority of shares ENTITLED to vote

this is changing. increasing number of states require only a majority of the shares that actually vote on the proposed fundamental change. but to be safe, apply traditional rule.

(4) most of the time, must deliver a document to the Secretary of State

163
Q

Dissenting Shareholder Right of Appraisal

A

Right to force corporation to buy your stock for fair value.

Shareholder’s exclusive remedy if she does not like a fundamental change absent fraud

164
Q

Changes triggering the right of appraisal

A

(1) merging or consolidating
(2) transferring substantially all assets
(3) stock being acquired in a share exchange, or
(4) conversion to another form of business

Exists in the close corporation

165
Q

Changes triggering the right of appraisal

EXCEPTION

A

No appraisal if the company’s stock is listed on a national exchange or if the company has 2,000 or more shareholders (not shares, shareholders)

166
Q

To perfect right of appraisal

A

a. before shareholders vote, file with corporation a written notice of objection and intent to demand payment
b. at the shareholder vote, abstain or vote against the proposed change and
c. after the vote, within time set by corporation, make written a demand to be brought out and deposit stock with the corporation

167
Q

Appraisal: Shareholder and Corporation Cannot Agree on Fair Value of Shares

A

Corporation sues and the court may appoint an appraiser

168
Q

Amendment of the Articles

A

(1) board of director action and notice to shareholders
(2) shareholder approval (majority of shares entitled to vote– although this is changing, in many states just need a majority of shares that actually voted)
(3) if approved, deliver amended articles to the Secretary of State
(4) no dissenting shareholder rights of appraisal

169
Q

Mergers or Consolidation Requirements

A

(1) board of director action (both corporations) AND notice to shareholders
(2) shareholder approval (generally both corporations)
(3) no shareholder approval required if a 90% or more owned subsidiary is merged into a parent corporation (short form merger)
(4) if approved, surviving corporation delivers articles of merger or consolidation to Secretary of State
(5) right of appraise for shareholders entitled to vote on the merger or consolidation and also for shareholders of subsidiary in short-form merger

170
Q

Effect of Merger or Consolidation

A

Surviving corporation succeeds to all rights and liabilities of the constituents. This makes sense because the constituent corporation disappeared.

A creditor of that corporation can sue the survivor (successor liability)

171
Q

Transfer of all or Substantially all of the assets not in the ordinary course of business or a “share exchange”

A

one company acquires all the stock of another

what constitutes “substantially all of the assets” varies from state to state– rule of thumb is at least 75% of assets

these are fundamental corporate changes for SELLING corporation only, not buyer

172
Q

Conversion

A

Business converts to another form (e.g. corporation converts to LLC).

Board approval, notice to shareholders, shareholder approval, deliver document to Secretary of State, dissenting shareholder’s right of appraisal

173
Q

Transfer of all or Substantially all of the assets not in the ordinary course of business or a “share exchange”

Requirements

A

(1) board action (both corporation) AND notice to selling corporation’s shareholders
(2) approval by the SELLING corporation’s shareholders (same number as amending articles)
(3) Dissenting shareholders of SELLING corporation have rights of appraisal
(4) deliver to Secretary of State articles of exchange in share exchange. Usually no filing
(5) usually no successor liability– exception if buyer is “mere continuation” of the seller (same management, shareholders, etc., or de facto merger)

174
Q

Voluntary Dissolution

A

Board of directors action and shareholder approval. File notice of intent to dissolve with Secretary of State. Corporation stays in existence to wind up. Notify creditors so they can make claims.

175
Q

Involuntary Dissolution

A

By court order.

Shareholder can petition because of:

(1) director abuse, waste of assets, misconduct
(2) director deadlock that harms the corporation,
(3) shareholders fail at consecutive annual meetings to fill a board vacancy

Court might, as an alternative, order a buyout of the objective shareholder (esp. in a close corp)

Creditor can petition because corp is insolvent and

(1) he has an unsatisfied judgment or
(2) corporation admits the debt in writing

176
Q

Dissolution is…

A

not the end of the corporation. Beginning of the process that will end the corporate existence. Corporation continues to exist, so it can sue and be sued. Cannot start new business, but must wind up

177
Q

Steps Taken in Winding Up

A

(1) Give written notice to known creditors and public notice of dissolution in a newspaper in the county of its principal place of business
(2) gather all assets
(3) convert assets to cash
(4) pay creditors
(5) distribute any remaining sums to shareholders, pro-rata by share unless liquidation preference

Bar Exam (15 decks)

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