Corporations Flashcards
De Facto Corporation + effect on personal liability
Recognition of corporate status despite failure to create de jure corporation. De facto status requires (1) corporate statute; (2) good faith attempt to incorporate; and (3) exercise of corporate privileges.
Shareholders of a de facto corporation will be insulated from personal liability, unless (i) shareholder was aware there was no valid corporation when it acted or (ii) quo warranto proceeding by the state
Corporation by Estoppel + effect on personal liability
Recognition of corporate status despite non-existence of de jure corporation. Persons who treat an entity as a corporation will be estopped from later claiming the entity is not a corporation.
Under corporation by estoppel, the shareholders will be insulated from personal liability for the business’s K obligations, but NOT its tort obligations.
Liability for pre-incorporation K
Promoter Liability
––A promoter–a person who acts on behalf of a corporation KNOWING it is not yet formed–is personally liable for the obligations incurred, absent an express agreement. This applies even if the third party knew the corporation had not been formed. This liability will continue after formation, unless there is a NOVATION (where 3P agrees to release the promotor of liability and the corporation agrees to be substituted as the liable party). Promoters are jointly and severally liable for pre-incorporation contracts.
Corporation Liability
––The corporation is not bound on pre-incorporation contracts, absent express or implied ADOPTION of the K. The reason for this is that an agent cannot bind a non-existent principal.
What are the 5 types of fundamental corporate changes? When does a shareholder have a right of appraisal?
1) amending the articles of incorporation
2) mergers
—note: exception where no significant change to surviving corporation —> in that instance, approval of shareholders of surviving Corp not required
3) disposition of substantial all property outside usual and regular course of business (for the disposing corp)
4) dissolution
5) share exchanges (for corp being acquired)
Shareholder has a right of appraisal (a right to force the corporation to buy her stock for fair value) if 2, 3, or 5 happen.
––No right of appraisal for amendment to articles of incorporation
What are the 4 required steps for carrying out a fundamental corporate change?
Step 1: board resolution
Step 2: notice to shareholders
Step 3: shareholder approval [quorum + votes for exceed votes against]
Step 4: filing w/ SoS, formalizing change
What is § 16(b)? What does π have to show?
Federal securities statute that seeks to prevent unfair use of insider information and internal manipulation of price. Imposes SL for covered transaction, such that no proof or use of insider information is required for liability.
π has to show…
(1) purchase + sale // sale + purchase within 6 MONTHS
(2) of an equity security (i.e., not a pure debt instrument)
(3) by an officer, director, or shareholder owning > 10% stock.
––Note: for the shareholder owning 10% stock, she must have owned the 10% BEFORE the purchase and sale.
Remedy: disparity between highest sale price and lowest purchase price in 6-month period. The profit realized can either be a gain or a loss avoided.
Profit realized: compare highest sale price against lowest purchase price w/in six month period.
Nb.: this is likely to come up as a derivative suit
What is § 10(b)(5)? What does π have to show?
Statute that creates a private right of action for violation of federal securities law. AIMED AT DECEIT.
ELEMENTS OF CoA
A private π must show…
(1) ∆ engaged in some fraudulent conduct
–Statement/omission must be MATERIAL (substantial likelihood that reasonable investor would consider it important)
–Conduct must have been w/ intent to deceive, manipulate, or defraud (SCIENTER)
(2) in connection w/ the sale or purchase of a security by π
(3) in interstate commerce
–Telephone or mail
(4) reliance by π on ∆’s fraudulent conduct and
(5) damages
–Difference b/n price paid by π and average share price in 90-day period) or rescission
INSIDER TRADING
10b5 prohibits a person from trading on the basis of insider information. Violation if a person breaches a duty of trust and confidence owed to (a) issuer, (b) shareholders of issuer, (c) another person who is the source of the material non-public information.
–Insiders: e.g., director/officer/controlling shareholder –> breach by giving info to friend or relative
–Tipper: can be liable for giving inside information to someone who trades on that information, if given for improper purpose
–Tippee: can be liable if (1) tipper breached duty of confidence and (2) tippee should have known tipper was breaching his duty
–Misappropriator: gov’t can prosecute for trading on market information in breach of duty of confidence owed to the source of the information.
Foreign Corporation
Cannot transact biz within a state until it has obtained certificate of authority. If it does conduct biz w/out certificate, it cannot bring suit in the foreign state (but it can be sued)
Who owns the corporation? Who manages the corporation? Who runs day-to-day
- Shareholders own
- Board of Directors manages
- Officers run day-to-day
Limited Liability for Corporation
Shareholders, Directors, and Officers are generally not personally liable for the debts of the business. Generally, only the corporation can be held liable for corporate obligations.
What are the two types of taxation classifications for corporations
Subchapter C
––Double taxation: corporation’s profits are taxed at the entity level, and then any distributions made to shareholders are taxed at the individual level
Subchapter S
––Pass through taxation: Profits and losses are not taxed at the entity level, but rather flow to the shareholders
––Requirements for Sub-S status: (1) all shareholders must be natural persons; (2) limit of 100 shareholders; (3) limit of one class of stock; (4) not publicly traded
How is a corporation formed?
Incorporator files articles of incorporation with SoS, containing: 1) name of corp; 2) # of authorized shares + description of stock; 3) name+address of registered agent, incorporator(s), and each initial director; 4) statement of purpose (generally required).
If no statement of duration –> presumed perpetual
Once that is done, a de jure corporation is formed.
Board of Directors will then hold organizational meeting where it (1) selects officers and (2) adopts bylaws
What happens if articles of incorporation includes specific statement of purpose, and the corporation engages in ultra vires activity?
At CL: UV Ks are void
Modern rule: UV Ks are valid as to 3Ps
Under the modern view, only the following can raise the UV issue:
1) A shareholder who seeks to enjoin a proposed UV action (but court of equity won’t grant it against an innocent 3P)
2) The corporation seeking damages against the officer/director who authorized the UV act
3) The state, seeking to dissolve the corporation for engaging in a UV act
Veil Piercing
Veil piercing is when a court disregards a corporate entity’s status and holds individuals personally liable for the corporation’s obligations. This is rare, but a court will do this in a given situation to avoid fraud or unfairness. Piercing requires a finding that (1) the shareholders ABUSED the privilege of incorporating and (2) FAIRNESS necessitates holding the shareholders liable.
Three situations where piercing occurs: (i) ignoring corporate formalities / alter ego [failure to respect separate corporate entity + injustice results]; (ii) undercapitalization @ inception [shareholders must put at risk unencumbered capital reasonably adequate for the corporation’s prospective liabilities]; (iii) where necessary to prevent fraud.
Veil piercing tends to occur in tort actions as opposed to K actions, because in K cases, the affected party had the opportunity to investigate the entity.
What is the role of shareholders?
They own the corporation; they do NOT manage the corporation (except closely held corporations). Shareholders have limited voting rights, which absent an agreement, permit them to vote on (1) election and removal of Directors; (2) adoption and modification of bylaws; (3) and approval of fundamental corporate changes.
What are the vehicles for shareholders to take action?
Voting at annual meeting
––purpose of annual meeting is to elect directors
––annual meeting is required
––required notice: time + place + 10-60 days notice
Voting at special meeting:
––special meeting can be called by Board or holders of 10%+ shares or anyone authorized
––required notice: same as annual, but PURPOSE is also required
Unanimous written consent of all shareholders
Which shareholders are eligible to vote?
Shareholders of record on the record date
What are shareholder proxies?
- WRITTEN agreement that a proxy will vote a person’s shares.
- Agreement is valid for 11 MONTHS, UNLESS it provides otherwise
- Generally REVOCABLE; can be IRREVOCABLE if the agreement states so and if it is coupled with an interest
