Corporations

Question 1

Organization: What is the incorporator’s job?

Answer 1

To execute the articles and deliver them to the Pennsylvania Department of State

Question 2

Organization: Who may serve as an incorporator of a PA corporation?

Answer 2

A person or an entity

Question 3

Organization: What information must be in the Articles of Incorporation? + What if AOI is silent as to duration or scope?

Answer 3

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

Question 4

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

Answer 4

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

Question 5

Organization: Capital Structure (Stock) That Must Be Included in AOI

Answer 5

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

Question 6

Organization: What happens at the organizational meeting?

Answer 6

The board or incorporator 1) selects officers, and 2) adopts the initial bylaws

Question 7

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

Answer 7

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)

Question 8

Corporation Law: Internal Affairs Rule - Which State Law Governs

Answer 8

The law of the state of incorporation governs the internal affairs of the corporation (i.e. roles, duties, relationship of directors)

Question 9

Corporation Law: Define Benefit Corporation (B-Corp) + Remember Shareholder Impact

Answer 9

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

Question 10

Corporation Law: Tax Consequences of Corporation (C v. S) + Remember Characteristics of S Corp

Answer 10

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

Question 11

Corporation Law: Limited Liability for Corporations and Their Shareholders + Remember Shareholder Tortious Conduct

Answer 11

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

Question 12

Defective Incorporation: Defenses to Failing to Form De Jure Corporation - De Facto Corporation Requirements

Answer 12

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

Question 13

Defective Incorporation: Defenses to Failing to Form De Jure Corporation - Corporation by Estoppel + Remember Types of Cases this Only Applies To

Answer 13

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

Question 14

Pre-Incorporation Contracts + Remember Who Is Liable (Express Adoption v. Implied Adoption) + Remember Promoter Liability

Answer 14

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

Question 15

Foreign Corporations Requirements + Remember Consequences of Not Properly Qualifying

Answer 15

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)

Question 16

Issuance of Stock: Types of Security Interests

Answer 16

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

Question 17

Issuance of Stock: What is an issuance of stock?

Answer 17

An issuance of stock is when the CORPORATION sells its own stock

Question 18

Issuance of Stock: Subscriptions Definition + Remember Revocability

Answer 18

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

Question 19

Issuance of Stock: What must the corporation receive when it issues stock?

Answer 19

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

Question 20

Issuance of Stock: Preemptive Right Definition + Remember Lack of Provisions (And Exception)

Answer 20

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

Question 21

Directors and Officers: Statutory Requirement Directors + Remember Silence in AOI About Number of Directors

Answer 21

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

Question 22

Directors and Officers: Selection of Initial Officers + Remember Selection Thereafter + Define Staggered/Collective Board

Answer 22

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)

Question 23

Directors and Officers: Who fires Directors, and for what cause? + Remember Classified Boards

Answer 23

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

Question 24

Directors and Officers: Is an individual director an agent of the corporation?

Answer 24

NO, individual directors DO NOT have authority to speak for or bind the corporation

Question 25

Directors and Officers: How does the Board take an act?

Answer 25

1) By UNANIMOUS agreement in WRITING, or

2) A meeting that satisfies QUORUM and VOTING requirements

Question 26

Directors and Officers: Notice of Board Meetings (Regular Meetings v. Special Meetings) + Remember Failure to Give Notice (And Exception)

Answer 26

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)

Question 27

Directors and Officers: Director’s Non-Delegable Fiduciary Duties

Answer 27

Directors MAY NOT give proxies or enter into voting agreements because, unlike shareholders, they have NON-DELEGABLE fiduciary duties to the corporation

Question 28

Directors and Officers: Quorums Definition + Minimum Directors Needed to Pass a Resolution

Answer 28

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

Question 29

Role of the Board + Remember Committees

Answer 29

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.)

Question 30

***Duty of Care: If a director is being sued for duty of care violation, who holds the burden of proof?

Answer 30

The burden is on the PLAINTIFF to prove a director violated their duty of care (different from duty of loyalty)

Question 31

***Duty of Care: The Standard (Includes Duty of Loyalty and Care)

Answer 31

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)

Question 32

***Duty of Care: Nonfeasance + Remember Causation

Answer 32

When a director FAILS TO DO anything

Remember: To prove a breach of fiduciary duty, PLAINTIFF MUST SHOW CAUSATION to corporation’s damages

Question 33

***Duty of Care: Misfeasance + Remember Business Judgment Rule

Answer 33

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

Question 34

**Duty of Loyalty: Who has the burden? + Remember Business Judgment Rule in Duty of Loyalty Cases

Answer 34

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

Question 35

**Duty of Loyalty: Interested Director Transactions + Remember Defense

Answer 35

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

Question 36

**Duty of Loyalty: Competing Ventures + Remedy

Answer 36

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)

Question 37

**Duty of Loyalty: Corporate Opportunity + What must a director do in order to take an opportunity from his corporation? + Remedy

Answer 37

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)

Question 38

**Duty of Loyalty: Which directors are liable for breach of fiduciary duty? + Remember Proper Dissent + Exceptions To Liability

Answer 38

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.)

Question 39

Officers Fiduciary Duties In General

Answer 39

Officers owe the SAME duties of care and loyalty as directors

Question 40

Officers: What authority do officer’s hold in a corporation? + Remember Multiple Offices

Answer 40

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

Question 41

Officers: Selection and Removal of Officers + Remember K Liability + Recap of Hire/Fire Relationship Between Directors/Officers/Shareholders

Answer 41

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)

Question 42

Indemnification: If a director or officer is sued, can they be reimbursed for defending themselves? (3 Scenarios) + Remember Exculpation in AOI

Answer 42

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)

Question 43

Shareholders: Do Shareholders manage the corporation? + Remember Closely Held Corporations (Define)

Answer 43

No, the Board manages, UNLESS it is a closely held corporation

Closely Held Corporations: Few shareholders AND stock is not publicly traded

Question 44

Shareholders: Closely Held Corporations - Who owes the fiduciary duties to the corporation? + Who owes the fiduciary duties to the shareholders?

Answer 44

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

Question 45

Shareholders: Are the shareholders liable for the acts or debts of the corporation? + Exception

Answer 45

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)

Question 46

Shareholders: Define Piercing the Corporate Veil

Answer 46

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

Question 47

Shareholders: Piercing Corporate Veil - Alter Ego Fact Pattern

Answer 47

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)

Question 48

Shareholders: Piercing Corporate Veil - Undercapitalization Fact Pattern

Answer 48

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

Question 49

Shareholder Derivative Suits Definition

Answer 49

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.

Question 50

Shareholder Derivative Suits: Can a shareholder bringing a derivative suit recover for costs and expenses? (Win v. Loss)

Answer 50

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

Question 51

Shareholder Derivative Suits: What are the requirements? + Remember Settlement

Answer 51

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

Question 52

Shareholder Derivative Suits: May the corporation move to dismiss the derivative suit?

Answer 52

Yes, only if the motion is based on an investigation by DISINTERESTED DIRECTORS

Question 53

Shareholder Voting: Who votes? + Remember Record Date + Exceptions

Answer 53

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)

Question 54

Shareholder Voting: Proxies - Silent as to Duration + Revocability

Answer 54

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

Question 55

Shareholder Voting: How do you pool voting power for shareholders?

Answer 55

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

Question 56

Shareholder Voting: Where do shareholders vote? + Special Meeting Requirements

Answer 56

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)

Question 57

Shareholder Voting: Notice Requirement + Consequence of Not Providing Notice (Exceptions)

Answer 57

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

Question 58

Shareholder Voting: Requirements to Set Forth a Shareholder Vote + How Many Votes to Pass (Proposal v. Director)

Answer 58

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)

Question 59

Shareholder Voting: Straight Voting v. Cumulative Voting

Answer 59

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)

Question 60

Stock Transfer Restrictions General Rule + Remember Enforcement on Transferee

Answer 60

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

Question 61

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

Answer 61

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

Question 62

Distributions: Types of Distributions to Shareholders

Answer 62

1) Dividend,
2) Repurchase of shareholder’s stock, and
3) redemption (forced sale)

Question 63

Distributions: Who sets distribution amounts?

Answer 63

The board sets the amount for distribution

Question 64

Distributions: Limitations on Distribution

Answer 64

The corporation may not make a distribution if (i) it is INSOLVENT, or (ii) if distribution would render i insolvent

Question 65

Fundamental Corporate Changes: Who makes these decisions? + Remember Shareholder Right of Appraisal (+ When This Occurs)

Answer 65

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)

Question 66

Fundamental Corporate Changes: Amendment of the Articles Requirements + Remember No Right of Appraisal

Answer 66

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

Question 67

Fundamental Corporate Changes: Mergers or Consolidations Requirements + Remember Right of Appraisal

Answer 67

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

Question 68

Fundamental Corporate Changes: Transfer of All or Substantially All Assets Requirements + Remember Only Seller Change + Remember Right of Appraisal Selling v. Buying Company Shareholders

Answer 68

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

Question 69

Fundamental Corporate Changes: Dissolution (Voluntary v. Involuntary)

Answer 69

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

Question 70

Securities: Rule 10b-5 + Elements + Types of Transactions + Proper Plaintiffs/Defendants

Answer 70

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

Question 71

Securities: Section 16(b) - Speculation by Directors, Officers, and 10% Shareholders + Whose claim is this? + What type of companies does this apply to? + Defendants

Answer 71

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)