Corporations Flashcards
Organization: What is the incorporator’s job?
To execute the articles and deliver them to the Pennsylvania Department of State
Organization: Who may serve as an incorporator of a PA corporation?
A person or an entity
Organization: What information must be in the Articles of Incorporation? + What if AOI is silent as to duration or scope?
1) STATEMENT that the corporation is formed under the Business Corporation law (BCL) of 1988
2) NAMES (of company) and ADDRESSES (of incorporator and office)
3) Name of REGISTERED AGENT
Remember: If AOI is silent as to duration, then the company has PERPETUAL EXISTENCE. And if silent as to activities of the corporation, the company can do ANY LAWFUL BUSINESS
Organization: Define Ultra Vires Activities + (1) Remember Validity of Ks + (2) Remember Remedy for Suit by Shareholders+ (3) Remember Who Is Responsible for Ultra Vires Losses
An ultra vires activity is beyond the scope of the articles of incorporation
(1) : Ultra vires Ks are VALID
(2) : A shareholder can sue for an INJUNCTION
(3) : The responsible manager is liable to the corporation for losses from an ultra vires K
Organization: Capital Structure (Stock) That Must Be Included in AOI
Articles MUST include: (i) authorized stock (meaning the max number of shares the corporation can sell), (ii) par value, (iii) voting rights, and (iv) preferences of each class of stock
Organization: What happens at the organizational meeting?
The board or incorporator 1) selects officers, and 2) adopts the initial bylaws
Organization: Define Bylaws + (1) Are They Filed With the State + (2) Remember Which Governs if AOI Conflicts + (3) Remember Who Can Amend or Repeal Bylaws
An internal document that serves as a corporation’s operating man
(1) : Bylaws are NOT filed with the state (they are internal documents)
(2) : AOI would govern
(3) : Only shareholders can amend or repeal bylaws (unless bylaws state otherwise)
Corporation Law: Internal Affairs Rule - Which State Law Governs
The law of the state of incorporation governs the internal affairs of the corporation (i.e. roles, duties, relationship of directors)
Corporation Law: Define Benefit Corporation (B-Corp) + Remember Shareholder Impact
A corporation formed for profit AND to pursue some benefit to a broader social policy issue
Remember: Decision-makers consider not just impact of decisions on shareholders, but also on the broader community or environmental purpose
Corporation Law: Tax Consequences of Corporation (C v. S) + Remember Characteristics of S Corp
C: A C Corp pays federal income tax on its profits, and shareholders pay income tax on distributions (double taxation)
S: Shareholders only pay income tax on an individual level
Remember: S Corps have NO MORE than 100 shareholders, all of whom are human and U.S. citizens, AND ONE CLASS OF STOCK that is not publicly traded
Corporation Law: Limited Liability for Corporations and Their Shareholders + Remember Shareholder Tortious Conduct
If the corporation incurs debt, breaches a K, or commits a tort, the corporation ITSELF IS LIABLE, not the shareholders
Remember: A shareholder who commits a tort is ALWAYS liable for that tort, but if it is inside the scope of their duties for the corp, the corp can be held vicariously liable
Defective Incorporation: Defenses to Failing to Form De Jure Corporation - De Facto Corporation Requirements
A corporation that fails to form officially WILL BE treated as a corporation for all purposes IF:
(i) There is a relevant incorporation statute (THERE IS - BCL),
(ii) The parties made a GOOD FAITH attempt to comply with it, and
(iii) Some exercise of corporate privileges
Defective Incorporation: Defenses to Failing to Form De Jure Corporation - Corporation by Estoppel + Remember Types of Cases this Only Applies To
One who treats a business as a corporation may be estopped from denying that it is a corporation
Remember: This can ONLY apply to CONTRACT cases, not tort
Pre-Incorporation Contracts + Remember Who Is Liable (Express Adoption v. Implied Adoption) + Remember Promoter Liability
When all parties are aware an corporation is NOT FORMED YET, a promoter acting on behalf of the soon-to-be corporation may enter into a contract before incorporation
Remember: A corporation will not be liable for a pre-incorporation contract until it adopts it expressly or impliedly (Express - the board says it adopts it/Implied - corporation accepts benefit of K)
Remember: A promoter is liable UNTIL NOVATION OCCURS, replacing the promoter as a party in the K. Therefore, even if corporation accepts benefit of K, promoter is still liable until novation occurs
Foreign Corporations Requirements + Remember Consequences of Not Properly Qualifying
To transact business regularly in PA, a foreign corporation (any corporation outside PA) is required to submit a FOREIGN REGISTRATION STATEMENT to the PA Dept. of State
Remember: A foreign corporation who does not do this CANNOT assert a claim in PA (but may be sued and defend themselves)
Issuance of Stock: Types of Security Interests
Debt Securities (Bonds): Creditor lends money to corporation and agrees to be paid back with interest, not an owner of corp.
Equity Securities (Stock): Corporation sells an ownership interest to someone
Issuance of Stock: What is an issuance of stock?
An issuance of stock is when the CORPORATION sells its own stock
Issuance of Stock: Subscriptions Definition + Remember Revocability
A subscription is a written offer to buy stock from a corporation
Remember: These offers ARE revocable anytime before the board of directors accepts the offer
Issuance of Stock: What must the corporation receive when it issues stock?
1) ANY tangible or intangible property or benefit to the corporation (i.e. money, promissory notes, future services), that is 2) determined ADEQUATE by the Board
Issuance of Stock: Preemptive Right Definition + Remember Lack of Provisions (And Exception)
The right of an EXISTING shareholder to MAINTAIN her percentage of ownership of buying stock when there is new issuance of stock
Remember: If there is no indication a preemptive right provision exists in the AOI, then NO PREEMPTIVE RIGHTS EXIST, UNLESS it is a STATUTORY CLOSE CORPORATION
Directors and Officers: Statutory Requirement Directors + Remember Silence in AOI About Number of Directors
There MUST be ONE OR MORE adult natural persons as directors
Remember: If the articles are SILENT about the number of directors, THERE MUST BE THREE
Directors and Officers: Selection of Initial Officers + Remember Selection Thereafter + Define Staggered/Collective Board
Initial directors an be named in the AOI or selected by incorporators
Remember: Thereafter, the SHAREHOLDERS select the directors
Staggered/Collective Board: Shareholders elect a portion of the board every year (e.g. 9 directors, three are elected each year, so every director serves 3 year terms)
Directors and Officers: Who fires Directors, and for what cause? + Remember Classified Boards
Shareholders can remove directors at any time WITH or WITHOUT cause, OR the BOARD can remove a director WITH CAUSE
Remember: Directors of classified boards can only be removed FOR CAUSE
Directors and Officers: Is an individual director an agent of the corporation?
NO, individual directors DO NOT have authority to speak for or bind the corporation
Directors and Officers: How does the Board take an act?
1) By UNANIMOUS agreement in WRITING, or
2) A meeting that satisfies QUORUM and VOTING requirements
Directors and Officers: Notice of Board Meetings (Regular Meetings v. Special Meetings) + Remember Failure to Give Notice (And Exception)
Regular: No notice required
Special: YES, at least FIVE DAYS written notice stating DATE, TIME, AND PLACE, but notice need not state purpose
Remember: A failure to give notice will render any action at that meeting VOIDABLE, unless those not given notice WAIVE (in writing or by attending the meeting without objecting)
Directors and Officers: Director’s Non-Delegable Fiduciary Duties
Directors MAY NOT give proxies or enter into voting agreements because, unlike shareholders, they have NON-DELEGABLE fiduciary duties to the corporation
Directors and Officers: Quorums Definition + Minimum Directors Needed to Pass a Resolution
A quorum is a majority of all directors PRESENT at a meeting to pass a resolution.
Only a MAJORITY of the directors present need to vote in favor of a resolution to pass it
Example: 9 total directors requires 5 to be present for a quorum, and only 3 need to vote in favor to pass
Role of the Board + Remember Committees
Manages the business, makes decisions about policy, selects and monitors officers, decides when the company will declare dividends, etc.
The board can delegate a committee (made up of a portion of directors from the board), but their power is limited (cannot amend by-laws, fill board vacancies, etc.)
***Duty of Care: If a director is being sued for duty of care violation, who holds the burden of proof?
The burden is on the PLAINTIFF to prove a director violated their duty of care (different from duty of loyalty)
***Duty of Care: The Standard (Includes Duty of Loyalty and Care)
A director must perform her duties in GOOD FAITH and WITH REASONABLE BELIEF her actions are in the best interest of the corporation. (LOYALTY) A directors must act with the degree of care A PRUDENT PERSON would use with regard to her own business (CARE)
***Duty of Care: Nonfeasance + Remember Causation
When a director FAILS TO DO anything
Remember: To prove a breach of fiduciary duty, PLAINTIFF MUST SHOW CAUSATION to corporation’s damages
***Duty of Care: Misfeasance + Remember Business Judgment Rule
The board’s actions cause harm to the corporation (causation is clear)
BJR: A presumption in DUTY OF CARE CASES (not loyalty) that when the board acted, it performed due diligence and had a rational basis for its decision
**Duty of Loyalty: Who has the burden? + Remember Business Judgment Rule in Duty of Loyalty Cases
The DEFENDANT (director) has the burden to prove they acted in the best interest of the corporation
BJR: Does NOT APPLY in duty of loyalty cases
**Duty of Loyalty: Interested Director Transactions + Remember Defense
Any deal between the corporation and one of its directors
Defense: An interested director transaction will be set aside IF: (i) the deal was fair, OR (ii) material facts were known and deal was approved by either shareholders or majority of disinterested directors
**Duty of Loyalty: Competing Ventures + Remedy
A director may not compete unfairly with her corporation.
Remedy: A CONSTRUCTIVE TRUST will be put on for the director’s profits made outside the corporation (account for her profits and give to corporation)
**Duty of Loyalty: Corporate Opportunity + What must a director do in order to take an opportunity from his corporation? + Remedy
A director CANNOT usurp a corporate opportunity (something the company needs or has a prospective business in)
Requirements: (i) tell the board, and (ii) wait for the board to reject the opportunity
Remedy: If property is still owned, it must be sold to the company at directors cost. If sold for profit, constructive trust (account for profit)
**Duty of Loyalty: Which directors are liable for breach of fiduciary duty? + Remember Proper Dissent + Exceptions To Liability
We presume that a director concurred with WHATEVER the board did, UNLESS his dissent is NOTED IN WRITING in corporate records
Exceptions: 1) A director who missed a meeting where the wrongful conduct took place, OR 2) good faith reliance on a reliable source (book of value assets, CFO statement, etc.)
Officers Fiduciary Duties In General
Officers owe the SAME duties of care and loyalty as directors
Officers: What authority do officer’s hold in a corporation? + Remember Multiple Offices
Officers are AGENTS of a corporation, and can bind the corp. according to their apparent or actual authority
Remember: An officer CAN hold multiple offices
Officers: Selection and Removal of Officers + Remember K Liability + Recap of Hire/Fire Relationship Between Directors/Officers/Shareholders
The board selects, monitors, removes and sets compensation for Officers
Remember: If the board violates K law (ex: breach K with CEO), they are liable for damages
Recap: Shareholders hire/fire directors (board), but the board hires/fires officers (CEO, CFO, CIO)
Indemnification: If a director or officer is sued, can they be reimbursed for defending themselves? (3 Scenarios) + Remember Exculpation in AOI
No Indemnification: If the officer or director WAS HELD liable to the corporation by a court
Mandatory Indemnification: If the director/officer wins a judgment
Option Indemnification: Any other scenario (typically a settlement)
Remember: The AOI can EXCULPATE liability FOR DIRECTORS (not officers) for breach of DUTY OF CARE (not loyalty)
Shareholders: Do Shareholders manage the corporation? + Remember Closely Held Corporations (Define)
No, the Board manages, UNLESS it is a closely held corporation
Closely Held Corporations: Few shareholders AND stock is not publicly traded
Shareholders: Closely Held Corporations - Who owes the fiduciary duties to the corporation? + Who owes the fiduciary duties to the shareholders?
Those shareholders IN CHARGE of managing the corporation have the fiduciary duties of care and loyalty
Shareholders owe fiduciary duties TO EACH OTHER, therefore controlling shareholders may be liable for oppressive acts toward minority shareholders
Shareholders: Are the shareholders liable for the acts or debts of the corporation? + Exception
Generally, no, the corporation is liable for what it does (even if only one shareholder)
Exception: In closely held corporations if a shareholder pierces the corporate veil (defined in another card)
Shareholders: Define Piercing the Corporate Veil
If a shareholder ABUSES THE PRIVILEGE of incorporating and FAIRNESS REQUIRES they be held responsible, they will be held liable for corporate acts or debts
Shareholders: Piercing Corporate Veil - Alter Ego Fact Pattern
A creditor may pierce the corporate veil (held liable b/c of abuse of privilege and fairness requires they be held responsible) by showing shareholder COMMINGLED ASSETS (e.g. bank accounts, corporation property)
Shareholders: Piercing Corporate Veil - Undercapitalization Fact Pattern
A creditor may pierce the corporate veil (held liable b/c of abuse of privilege and fairness requires they be held responsible) by showing shareholders failed to invest enough to cover prospective liability
Shareholder Derivative Suits Definition
In a derivative suit, a shareholder is suing to enforce the corporation’s claim. Not her own personal claim. For some reason, the corporation did not sue, so a shareholder steps in to vindicate the corporate claim.
Shareholder Derivative Suits: Can a shareholder bringing a derivative suit recover for costs and expenses? (Win v. Loss)
Win: Yes, recovered by corporation
Loss: No, no recovery AND may be liable to defendant if suit was brought without reasonable cause or in bad faith
Shareholder Derivative Suits: What are the requirements? + Remember Settlement
1) Stock ownership (at the time of the claim)
2) Must fairly represent the interest of the shareholders
3) Make a WRITTEN demand on directors that the corporation bring the suit (UNLESS P can show irreparable injury to the corporation if demand is made)
4) Plead with particularity her efforts why demand for corporation to sue was futile, and
5) Corporation is joined as D
Remember: A party can only settle or dismiss a shareholder derivative suit WITH COURT APPROVAL
Shareholder Derivative Suits: May the corporation move to dismiss the derivative suit?
Yes, only if the motion is based on an investigation by DISINTERESTED DIRECTORS
Shareholder Voting: Who votes? + Remember Record Date + Exceptions
Each outstanding share gets one vote (outstanding share - issued stock not reacquired by the corporation) as of the “record date”
Exceptions: 1) Death of shareholder (can be voted by executor), 2) Proxy (appointing someone to vote for you)
Shareholder Voting: Proxies - Silent as to Duration + Revocability
In PA, if a proxy is silent as to duration it will last THREE YEARS
Revocability: Always revocable (even if says it is irrevocable), UNLESS the proxy says it is irrevocable AND coupled with an interest in the shares other than voting
Shareholder Voting: How do you pool voting power for shareholders?
1) Voting Trust ((i) written agreement controlling how shares will be voted, (ii) copy sent to corp., (iii) transfer legal title to trust, (iv) shareholders receive trust certificates), OR
2) Pooling agreement (oral or written) contracting shareholders to vote a certain way
Shareholder Voting: Where do shareholders vote? + Special Meeting Requirements
1) Annual meetings, or
2) Special meetings ((i) called by the board, (ii) holders of at least 20% of voting shares, OR (iii) someone else provided in AOI)
Shareholder Voting: Notice Requirement + Consequence of Not Providing Notice (Exceptions)
WRITTEN notice must be given TO ALL SHAREHOLDERS entitled to vote for EVERY MEETING (annual or special), but if special the stated purpose of the meeting must be included
Consequence: The action is VOIDABLE unless those not sent notice waive expressly or impliedly by attending the meeting without objection
Shareholder Voting: Requirements to Set Forth a Shareholder Vote + How Many Votes to Pass (Proposal v. Director)
A quorum must be represented by the majority NUMBER OF OUTSTANDING SHARES (not shareholders)
# of Votes: Proposal - majority of shares that ACTUALLY vote Director - PLURALITY (the person who gets more votes for the seat than anyone else)
Shareholder Voting: Straight Voting v. Cumulative Voting
Straight - Separate election for EACH SEAT of the board, one vote per share (dilutes minority votes)
Cumulative - One at-large election for ALL SEATS of the board, each board seat up for vote multiplied by number of shares (gives minority shareholders more power)
Stock Transfer Restrictions General Rule + Remember Enforcement on Transferee
Stock transfer restrictions are okay IF REASONABLE, meaning not an undue restraint on alienation
Remember: The restriction can ONLY be enforced against a transferee IF: (i) it is CONSPICUOUSLY on the stock certificate, OR (ii) the transferee has ACTUAL KNOWLEDGE
Right of Shareholder To Inspect and Copy the Books and Records: What rights do the shareholders have for inspecting and copying books and records? + Remember Proper Purpose
Shareholders have a common law right to INSPECT, covering a broad range of documents
Remember: To make a demand a shareholder MUST state a proper purpose, meaning it has to be related to his or her interest as a shareholder
Distributions: Types of Distributions to Shareholders
1) Dividend,
2) Repurchase of shareholder’s stock, and
3) redemption (forced sale)
Distributions: Who sets distribution amounts?
The board sets the amount for distribution
Distributions: Limitations on Distribution
The corporation may not make a distribution if (i) it is INSOLVENT, or (ii) if distribution would render i insolvent
Fundamental Corporate Changes: Who makes these decisions? + Remember Shareholder Right of Appraisal (+ When This Occurs)
This requires board action AND notice to shareholders AND approval by a majority of shares actually cast on the issue
Remember: Dissenting shareholders IN CLOSELY HELD CORPORATIONS have a right of appraisal, which means they can force the corporation to pay for your stock at fair value (only if there is a merger, consolidating, transferring of all assets, or share being acquired in a share exchange)
Fundamental Corporate Changes: Amendment of the Articles Requirements + Remember No Right of Appraisal
1) Board of directors action,
2) Notice to shareholders,
3) Majority vote of ACTUAL shareholder votes, and
4) if approved, letter to PA Dept. of State
Remember: No right of appraisal for amendment to articles of incorporation
Fundamental Corporate Changes: Mergers or Consolidations Requirements + Remember Right of Appraisal
1) Board of director action,
2) Notice to shareholders,
3) Majority vote of actual shareholders voting,
4) If approved, file articles of merger or consolidation to PA Dept. of State
Remember: Mergers and consolidations DO have a right of appraisal
Fundamental Corporate Changes: Transfer of All or Substantially All Assets Requirements + Remember Only Seller Change + Remember Right of Appraisal Selling v. Buying Company Shareholders
These are ONLY fundamental changes for the seller, NOT the buyer
1) Board of directors action,
2) Approval by SELLING corporation’s shareholders (not buyers)
Remember: Right of appraisal is ONLY available for the selling company shareholders
Fundamental Corporate Changes: Dissolution (Voluntary v. Involuntary)
Voluntary: Board of directors action and notice to shareholders and approval by a majority of the shares actually voting on the issue
Involuntary: Shareholder or director petitions because of fraudulent, illegal, or oppressive act OR creditor if corporation is insolvent
Securities: Rule 10b-5 + Elements + Types of Transactions + Proper Plaintiffs/Defendants
Prohibits fraud or misrepresentation IN CONNECTION WITH the purchase or sale of any security
Elements: (i) Deal uses an “instrumentality of interstate commerce” (e.g. mail, telephone),
(ii) materiality (a reasonable investor would consider important),
(iii) scienter (intent to deceive, recklessness can suffice), and
(iv) Reliance
Types of transactions: 1) Misrepresentation, 2) Insider trading, or 3) Tipping
Plaintiffs: SEC or a BUYER OR SELLER of securities who was defrauded
Defendants: The corporation, buyer or seller who misrepresents material information/inside information, or tipper/tippee
Securities: Section 16(b) - Speculation by Directors, Officers, and 10% Shareholders + Whose claim is this? + What type of companies does this apply to? + Defendants
Provides for recovery by “profits” gained by INSIDERS from BUYING AND SELLING the company’s STOCKS within SIX MONTHS
This is the CORPORATION’S claim
Applies ONLY to PUBLICLY TRADED corporations
Defendants: 1) Director (either when bought or sold), 2) Officer (when bought or sold), or 3) Shareholder who owns 10% (both when bough and when sold)
