Corporations Flashcards
1
Q
What are the five fact patterns that will be tested?
A
- Corporate formation
- Issuance of stock
- Directors and officers
- Rights of shareholders
- Fundamental corporate changes
2
Q
What are the two parties involved with corporate formation?
A
Promoters
- Persons acting on behalf of a corporation not yet formed
Subscribers
- People or entities that make written offers to buy stock of a corporation not yet formed
3
Q
When does a corporation become liable on a promoter’s pre-incorporation contract?
A
Only when:
- The corporation is formed, and
- The corporation adopts the contract by either:
- Express BOD resolution
-
Implied adoption through:
- Knowledge of the contract, and
- Acceptance of its benefits
- E.g., ratification
4
Q
When does a promoter become liable on his pre-incorporation contracts?
A
The promoter remains personally liable on pre-incorporation contracts until:
-
Novation
- An agreement between:
- The promoter,
- The corporation, and
- The contracting third party
- That the corporation will replace the promoter under the contract
- An agreement between:
5
Q
Who is liable if the promoter enters into a pre-incorporation contract and the corporation is never formed?
A
The promoter alone is personally liable
6
Q
Who is liable if the promoter enters into a pre-incorporation contract and the corporation merely adopts the contract without novation?
A
Both the corporation and the promoter are liable at the election of the third-party
7
Q
What duties do promoters owe to corporations?
A
Promoters are fiduciaries of eachother and the corporation
So, promoters owe a duty of loyalty to eachother and the corporation, which means no:
-
Self-dealing
- Receiving a benefit to the corporation’s detriment
-
Usurping the corporation’s opportunity
- Taking an opportunity the corporation had
-
Secret profits
-
Making a profit at the corporation’s expense without disclosure
- E.g., Sale to corporation of promoter’s own property at profit without disclosure
-
Making a profit at the corporation’s expense without disclosure
8
Q
If a promoter acquires property before becoming a promoter and sells it to the corporation at a profit, can he retain the profit?
A
Only if the property is sold at fair market value
9
Q
If a promoter acquires property after becoming a promoter and sells it to the corporation at a profit, can he retain the profit?
A
No. This violates the duty of loyalty even if sold at fair market value
10
Q
When can a subscriber revoke an offer to buy shares of a corporation not yet formed?
A
Only 6 months after making the offer.
Under Virginia corporate law, a pre-incorporation offer to buy stock is irrevocable for 6 months
11
Q
Who are incorporators?
A
The persons who merely sign and file the articles of incorporation with the State Corporation Commission (SCC)
12
Q
How do you form a corporation?
A
- File articles of incorporation with the SCC
- Adopt by-laws
13
Q
What are by-laws?
A
The laws by which a corporation is governed
14
Q
What must be included in the articles of incorporation?
A
“A PAIN”
-
Authorized shares
- __Maximum number of shares of each class of stock the corporation is authorized to issue
- This is a ceiling
- The corporation must amend the articles to raise the ceiling
-
Preferences
- __Preferences and rights assigned to each class of stock
-
Agent
- Name and address of registered office for agent to accept service of process
-
Incorporators
- __Name(s) and addresse(s)
-
Name of corporation
- __Must contain some indication of corporate status
- E.g., corporation, incorporated, Inc., Corp., etc.
- __Must contain some indication of corporate status
15
Q
What is the legal significant of the formation of a corporation?
A
- It is illegal to do business as a corporation unless properly formed
- A corporation is a separate legal person
- Limited liability
- Generally, shareholders are not personally liable for debts of a corporation; only for the price of his stock
16
Q
When will a court pierce the corporate veil?
A
This is a doctrine in equity, so courts are more willing to pierce the veil for a tort victim than a contract claimant
The court will pierce the corporate veil if:
- Necessary to avoid fraud or unfairness
- The corporation serves as an alter ego
- Controlling shareholder fails to observe sufficient corporate formalities (i.e., treats corporation as itself)
- __E.g., CEO commingles personal and corporate funds
- Controlling shareholder fails to observe sufficient corporate formalities (i.e., treats corporation as itself)
- The corporation is undercapitalized
- Corporation has insufficient funds to satisfy its foreseeable obligations
- __E.g., Corporation operates in a dangerous business, has no insurance, and minimal capitalization
- Corporation has insufficient funds to satisfy its foreseeable obligations
17
Q
What is a foreign corporation?
A
A corporation incorporated outside of Virginia
18
Q
What does “transacting business” mean?
A
The regular course of intrastate (not interstate) business activity
19
Q
When can a foreign corporation transact business in Virginia?
A
When it obtains a certificate of authority from the SCC, including:
- The same information required by the articles of incorporation (i.e., “A PAIN”)
20
Q
What are the consequences for foreign corporations that transact business in Virginia without qualifying?
A
- A modest fine may be imposed
- Foreign corporation may not initiate a lawsuit in Virginia state courts
- But it may be sued and file counterclaims
21
Q
What must a corporation receive when it issues stock?
A
Par value (i.e., minimum issuance price)
22
Q
When can a corporation acquire property or other consideration with par value stock?
A
Anytime that the BOD values the property or other consideration to be worth at least part value
23
Q
What does “no par” mean?
A
The stock has no minimum issuance price
So, any valid consideration can be received if deemed adequate by the BOD
Note: this is the contemporary approach
24
Q
What is treasury stock?
What is its par value?
A
Stock that was previously issued and then reacquired by the corporation
It is deemed to be no par stock
25
What are the consequences of issuing stock for less than par value?
The corporation can _recover the difference_ between the issuance price and part value _from_:
* The BOD
* The shareholder-purchasers
26
What are preemptive rights?
The right of:
* An _existing shareholder_
* To maintain her _percentage_ of ownership
* By buying stock whenever there is a _new issuance_
* Of stock for _cash_
27
What if the articles of incorporation are silent or the bar exam question does not indicate whether the articles of a corporation provide for preemptive rights?
They do not exist.
In Virginia, preemptive rights do not exist _unless expressly granted_ in the articles of incorporation
28
How many members must be on the BOD of a Virginia corporation?
One
29
What control do shareholders have over the BOD?
Shareholders have the power to:
* _Elect_ directors
* _Remove_ directors
* Even before their term expires
* Even without cause
30
What are the requirements regarding BOD meetings?
* BOD meetings are _required_ unless all directors consent in writing
* Methods for _notice_ of BOD meetings can be set in the by-laws
* _Proxies_ are not allowed (but conference calls are okay)
* _Voting agreements_ are not allowed
* In order to _do business_, there must be a _quorum_ (i.e., a _majority of all_ directors)
* A _different_ percentage may be set in the bylaws
* It cannot be _fewer than 1/3_ of all directors
* In order to _pass a resolution_, there must be a _majority vote of those **present**_
* **__**E.g., if there are 9 directors, 5 must be present and 3 must vote for a resolution to pass
31
What duties do directors owe to the corporation?
Directors are _fiduciaries_ of the corporation
So, they owe the following duties to the corporation:
* Duty of _care_
* Duty of _loyalty_
* Duty to _manage_ the corporation
32
In exercising their duty to manage the corporation, when will directors be protected from liability?
When the _business judgment rule_ applies
This is a _presumption_ that the directors manage the corporation _in good faith_ and in the _best interests_ of the corporation and its shareholders
Directors will not be liable for _innocent mistakes of business judgment_
33
In exercising their duty of care to the corporation, when will directors be protected from liability?
* When they act with the care that a _prudent person_ would use with regard to his own business
* When the _articles have limited director liability_ for breaching their duty of care
34
When will a director breach his duty of loyalty to the corporation?
If the director:
* Engages in _self-dealing_
* Interested director transaction
* Director receives an unfair benefit to himself (or a relative or another one of his businesses) in a transaction with the corporation
* _Usurps_ corporate opportunities
* Director usurps for himself an opportunity that the corporation would have pursued
35
In exercising their duty of loyalty to the corporation, when will a director be protected from liability?
When the director:
* Discloses the transaction to the BOD, and
* The transaction is _ratified_ by:
* A majority vote of _independent directors_
* A majority vote of shares held by _independent shareholders_
_Note_: in Virginia, independence is presumed unless otherwise stated
36
What is a corporation _prohibited_ from indemnifying a director?
When _must_ a corporation indemnify a director for liability?
When _may_ a corporation indemnify a director for liability?
A corporation can _never_ indemnify a director who:
* Has been found _liable_ to the corporation
A corporation _must_ indemnify a director who:
* Has been found _not liable_ against any party
A corporation _may_ indemnify a director who:
* Has been found _liable_ to _third parties_ or _settled_ with the _corporation_, and
* Shows that he acted in _good faith_ and with the reasonable belief that his conduct was in the corporation's _best interest_
37
Who can determine whether to grant permissive indemnity to a director?
1. A _majority of independent_ directors
2. A _committee_ of at least 2 independent directors
3. A _majority of shares_ held by _independent shareholders_
4. **A _special lawyer's opinion_ reccomends indemnification**
38
What is a derivative suit?
A shareholder sues one or more directors to enforce the _corporation's cause of action_
If the corporation could have brought the suit, it is a derivative suit
39
What are the requirements for bringing a derivative suit?
1. Contemporaneous stock ownership
* Shareholder must:
* Own at least one share of stock at the time the claim _arose_
* Fairly and adequately represent the corporation's _best interest_
* A _committee of two or more independent directors_ can investigate and move for dismissal if it concludes that the suit is not in the best interest of the corporation
2. Demand
* Shareholder must:
* Make _demand on directors_ that the corporation bring suit
* And either:
* Demand was _rejected_, or
* At least _90 days_ _passed_ since demand was made
40
How do you determine whether a derivative suit was in the best interests of the corporation?
A _committee of two or more independent directors_ can investigate and move for dismissal if it concludes that the suit is not in the best interest of the corporation
41
What are the consquences of a successful derivative suit?
Recovery:
* Goes _only the the corporation_ itself, and
* It _limited_ by the greater of:
* The director's _last 12 months compensation_
* $100,000
42
Which shareholders have a right to vote at a shareholder meeting?
Only the _record shareholder_ as of the _record date_ has the right to vote
43
What is a record shareholder?
What is the record date?
Record shareholder
* Person shown in the corporate records as the _owner_ of stock
Record date
* A voter cut-off set at _no_ _more than 70 days before_ the meeting
44
What is a proxy?
* A _writing_ or electronic transmission
* _Authorized_ by a record shareholder
* Directed to the _secretary of the corporation_
* Authorizing another person to vote his shares
* Valid for only _11 months_
45
When are proxies revocable?
Revocable unless:
* _Labeled_ irrevocable, and
* _Coupled_ with an interest
46
If a proxy is labeled irrevocable, can it still be revoked?
Yes, unless it is _also coupled with an interest_
* E.g., the recipient has an ownership interest in the shares themselves
47
Where do shareholders vote?
* _Annual_ meeting
* Every corporation must have an annual meeting at which _at least 1 director position_ is open for election
* _Special_ meeting
* Meeting of shareholders to vote on:
* A _proposal_
* A _fundamental change_
48
What is the notice requirement for shareholder meetings?
What must the notice include?
When does notice have to be given?
The corporation must give _written_ notice to _every shareholder_ entitled to vote, for _every meeting_ (annual or special)
Contents
* _Annual_ meeting
* Time
* Place
* _Special_ meeting
* Special purpose
* Nothing else can take place at the meeting that is not in the notice
Timing
* _Annual_ meeting
* 10 - 60 days prior
* _Special_ meeting
* 25 - 60 days prior
*
49
What is the consequence of failing to give proper notice to shareholders of a shareholder meeting?
Action taken at the meeting is _void_ unless those who did not get notice:
* _Waive_ their objections in _writing_, or
* _Attend_ the actual meeting
50
What are the requirements for a shareholder meeting?
There must be a _quorum_ of shareholders represented at the meeting, which focuses on:
* Number of _shares_ represented (not shareholders)
Once achieved, a quorum _cannot be broken_ if a shareholder leaves a meeting
51
When is action approved at a shareholder meeting?
When votes for it _exceed votes against it_, unless:
* The articles of incorporation require a higher vote
52
How can multiple shareholders increase their influence on corporate policy?
By using "block voting" (i.e., always voting alike):
* _Voting trust_ (old)
* Formal _written delegation of voting power_ to a voting trustee _for up to 10 years_
* _Voting agreement_ (new)
* Agreement _in writing_ to all vote their shares _as the majority_ of the signers of the agreement direct
53
What is traditional straight voting?
Whatever number of shares you have, you get that many votes for each directorship position
* E.g., if you have 1,000 shares and 9 directorships are open, you can vote 1,000 shares for your preferred director 9 times
* So if anyone has 1,001 shares, you will lose 9 times over
54
What is cumulative voting?
Whatever number of shares you have, you can multiply that number by the number of directorship positions open and place that many votes in a single position
* E.g., if you have 1,000 shares and 9 directorships are open, you can vote 9,000 shares for your preferred director in just one election in which the top 9 voters win
55
If the articles of incorporation are silent as to whether shareholders can vote cumulatively, is it allowed?
In Virginia, cumulative voting is not allowed unless granted in the articles of incorporation
56
When can a shareholder inspect and copy the books and records of the corporation?
_Unqualified_ right
* _Any shareholder_ may inspect and copy corporate records maintained at the corporation's principal office (e.g., articles, bylaws, minutes) if they:
* _Sign_ a _written request_
* Giving _5 days_ advance notice
_Qualified_ right
* A shareholder who either:
* Has been a recordholder for _more than 6 months_
* Owns _6% or more_ of the company's stock
* Obtains _court approval_
* __May inspect _additional_ corporate books and records if they:
* _Sign_ a _written notice_
* Stating a _proper purpose_
57
When can dividends be declared, and by whom?
The BOD has _almost unlimited discretion_ to declare dividends
A corporation _cannot_ declare dividends or distributions if:
* _Insolvent_, or
* The dividend would _render it insolvent_
Insolvent means:
* Unable to pay debts as they come due, or
* Assets \< liabilies
58
When a dividend is declared, what is the priority of distribution?
1. Preferred shares get their _preference_
2. If preferred shares are cumulative, they get any _cumulative_ amount
3. If preferred shares are _participating_:
* The remaining amount is shared equally between:
* Preferred shareholders, and
* Common shareholders
4. If preferred shares are _not participating_:
* The remaining amount is shared equally between:
* Common shareholders
59
Who is liable for unlawful dividends or distributions?
Directors are personally liable, but they have:
* A defense based on a _g__ood faith reliance_ on a financial officer's representations
* A _right of contributions_ against:
* Co-directors
* Shareholder-recipients of the unlawful dividend
60
How can shareholders eliminate the formalities associated with a corporation?
* Must be a _non-public_ corporation (i.e., not listed on a national exchange or traded in a regular market)
* Must have a _unanimous shareholder agreement_ in:
* Articles of incorporation, or
* Bylaws
* Valid for _10 years_, unless otherwise indicated
61
What are the consequences of eliminating the formalities of a corporation?
1. Court will not _pierce the veil_ to render shareholders liable even if they fail to observe the formalities
2. Likely _subchapter-S corporation_ status
* S-Corps are:
* Treated as a _partnership for tax purposes_
* Limits:
* No more than _100 owners of stock_
* No more than _1 class of stock_
62
What are the benefits of a limited liability company (LLC)?
* _Limited liability_ of a corporation
* _Beneficial tax status_ of a partnership
This is the **_best business structure_** if asked
63
What are the formation requirements for an LLC?
Must:
* File _articles of incorporation_ with SCC
May:
* Adopt an _operating agreement_
64
How is control shared in an LLC?
Owner-members may:
* _Manage_ the corporation, or
* _Delegate_ to a team of managers with the same rights and liabilities as a BOD
65
Is the life of an LLC indefinite?
No. An LLC dissolves:
* Upon the _unanimous consent_ of members, or
* As provided for in the _articles_ or _operating agreement_
66
Are interests in an LLC transferrable?
A full membership interest may not be transferred without:
* _Majority consent_ of members, or
* As provided in the _articles_ or _operating agreement_
67
What do LLCs equal?
Limited liability
Limited life
Limited liquidity
Limited tax
68
How is a Virginia Business Trust formed?
* File _article of trust_ that creates:
* A _managing trustee_, and
* _Beneficial owners_
69
Does the Virginia Business Trust offer limited liability?
Yes. The beneficial owners can manage the trust without incurring liability.
70
Is the life of a Virginia Business Trust indefinite?
Yes. A Virginia Business Trust can go on forever for any lawful business
71
What are "fundamental changes"?
1. Merger (A becomes B)
2. Consolidation (A and B become C)
3. Share exchange (A and B exchange shares)
4. Dissolution (A dissolves)
5. Fundamental amendment of the articles (e.g., increasing authorized shares)
6. Sale (not purchase) of substantiall all the assets
72
What are the necessary steps for a fundamental change?
1. _Resolution_ by BOD at a _valid meeting_
2. _Notice_ of a _special meeting_ (25 - 60 days in advance)
3. _Approval_ by _more than 2/3_ of all shares entitled to vote
* Articles may provide for different percentage, but _not less than a majority_
4. Possibility of _dissenting shareholder_ right of appraisal for:
* Merger
* Consolidation
* Share exchange
* Sale of substantially all assets
5. File _notice_ with SCC
73
What is the dissenting shareholder's right of appraisal?
What is the process?
The right of a shareholder to force the corporation to buy his shares _at fair value_
Process:
* Shareholder perfects the right by:
1. _Before_ shareholder vote, file _notice_ in writing of intent to object and demand payment
2. _At_ shareholder vote, do not vote in favor (i.e., either object or abstain)
3. _After_ shareholder vote, make timely demand in writing to be bought out
74
What happens if a dissenting shareholder and the corporation cannot agree on the fair value of the shares?
In Virginia, the court will adopt an _expert appraiser_ to value the shares, and it is _binding_
75
What is the process for making ministerial amendments to the articles of incorporation (e.g., the agent's address)?
The BOD on its own can effectuate these
76
How many shareholder votes are required to effectuate a fundamental amendment to the articles of incorporation?
If the amendment _does not adversely affect_ a particular class:
* More than 2/3 of the shares of the entire corporation
If the amendment _does adversely affect_ a particular class:
* More than 2/3 of the shares of the entire corporation, and
* More than 2/3 of the shares of the particular class
77
Is the sale of all or substantially all of the assets of a corporation a fundamental corporate change?
Only for the selling corporation
