corporations Flashcards
define what it means to be a corporation
corporation = a DISTINCT LEGAL ENTITY that can conduct business in its own right by BUYING, SELLING, AND HOLDING PROPERTY or by SUING AND BEING SUED, and by LASTING FOREVER
has LIMITED LIABILITY
Who are the three main groups of people involved in a corporation?
SHAREHOLDERS: investors, ultimate owners of a residuary interest in a corporation
DIRECTORS: elected by shareholders, responsible for MAJOR corporate decisions, APPOINT OFFICERS
OFFICERS: run the corporation on a daily basis
Who is a promoter?
What are the duties of a promoter?
promoter = guy who does the work of the corporation before it exists, trying to get one to happen
he ENTERS INTO CONTRACTS on behalf of the corporation, even before it exists
he is a FIDUCIARY of the corp: NO SECRET PROFITS
who is liable for pre-incorporation agreements?
the PROMOTER is PERSONALLY LIABLE
CORPORATION is NOT LIABLE UNLESS there’s been a NOVATION, which is an agreement between ALL THREE: promoter, corp, and third party. in that case, corporation is substituted for promoter under the agreement
What is required to incorporate a corporation?
What is the liability of an incorporator?
INCORPORATOR must SIGN AND FILE the articles of incorporation and pay a fee.
incorporators are NOT LIABLE for contracts formed by promoters.
What are the articles of incorporation?
What must they include?
like a CONSTITUTION for the corporation: establishes BASIC RIGHTS of shareholders
Must include:
- -name
- -agent
- -incorporators
- -PURPOSE of corporation
- -AUTHORIZED SHARES
What is the ultra vires doctrine?
Who can bring an ultra vires challenge?
Are these common today?
Challenge that a corporation has acted BEYOND ITS POWERS as defined by its purpose in the articles of inc
can be brought by:
- -shareholders
- -corporation itself (against directors or officers)
- -the state
NB: not common today because most corps’ purpose is “to engage in lawful activity.”
When does limited liability for a corporation being?
the MOMENT OF INCORPORATION
= when the SEC OF STATE ACCEPTS THE FEE and FILES THE ARTICLES
What is the difference between articles of inc and bylaws?
If they conflict, which wins?
Bylaws can be amended by the board, while articles can only be amended by shareholders
bylaws also aren’t required, while articles are
in conflict, ARTICLES ALWAYS WIN
What is the difference between a de jure and de facto corporation?
When will a de facto corporation still be treated as a corporation with limited liablity?
de jure: created once all statutory requirements for inc have been satisfied
de facto: DEFECTIVE. not properly formed.
de facto is still granted limited liability if organizers:
1) made a GOOD FAITH EFFORT to comply with incorporation process; AND
2) have no ACTUAL KNOWLEDGE of a defect in the corporate status
What is the general rule of shareholder liability?
What factors are used to decide whether a court should pierce the veil?
When are courts more likely to pierce the veil?
GENERAL RULE: shareholders are NOT personally liable for debts of corporation, but only liable for the AMOUNT INVESTED into the corporation, EXCEPT court may PIERCE THE VEIL of limited liability to avoid FRAUD OR UNFAIRNESS.
THREE FACTORS:
1) ALTER EGO: investor/shareholder doesn’t observe corporate formalities; treats company just like himself.
2) UNDERCAPITALIZATION: failure to maintain funds sufficient to cover foreseeable liabilities
3) FRAUD: parties engaged in fraud-like behavior or fraud
more likely to pierce veil in TORT SITUATIONS than CONTRACTUAL SITUATIONS
What are creditors entitled to financially?
What about stockholders?
ONLY TO repayment of their LOAN plus INTEREST
stockholders are EQUITY holders: entitled to ALL the value that remains in a corporation after the debts have been paid
What is preferred stock?
Has PREFERENCE over COMMON stock with respect to:
1) DIVIDENDS
2) LIQUIDATION
What is the priority order of recouping an investment upon liquidation?
1) SECURED CREDITORS
2) PREFERRED SHAREHOLDERS
3) COMMON STOCKHOLDERS
What are the four types of shares?
Which type of shares have the ability to vote?
1) AUTHORIZED SHARES: MAX NUMBER of shares that directors can sell
- -set in articles of inc
- -need shareholder approval to sell more
2) ISSUE SHARES: number of shares from authorized pool that directors have ACTUALLY SOLD
3) OUTSTANDING SHARES: shares once issues to shareholders and STILL IN THEIR POSSESSION (not reacquired)
4) TREASURY SHARES: stock previously issued to shareholders but then REACQUIRED by corporation
ONLY OUTSTANDING SHAREHOLDERS CAN VOTE
What is par value stock?
What is watered stock?
a corp MAY, but is NOT REQUIRED to, issue stock at a PAR VALUE
if it does, must sell shares for at least the minimum par value
if the corporation sets a par value but sells stock for less than that, the stock is WATERED STOCK
–SHAREHOLDERS who bought the watered stock are LIABLE to the CREDITORS of the corporation
What are stock subscriptions?
Can they be revoked?
when people buy stock IN ADVANCE of INCORPORATION
IRREVOCABLE for UP TO SIX MONTHS (based on contract)
What are preemptive stock rights?
right to ACQUIRE STOCK in order to MAINTAIN PERCENTAGE OF OWNERSHIP any time NEW SHARES are issued.
default rule: shareholders DO NOT HAVE preemptive rights unless negotiated or included in articles
What are the two ways to get money OUT of a corporation?
1) board can declare a DIVIDEND (typically cash)
2) board can BUY BACK shares
Who can authorize dividends?
Who has a right to dividends?
When can’t dividends be authorized?
What happens to those who voted for them if they are wrongfully authorized?
ONLY THE BOARD can authorize dividends
shareholders have NO RIGHTS to dividends
Board CANNOT declare dividends when:
1) corporation is INSOLVENT; OR
2) corp would BECOME INSOLVENT by ISSUING the dividend
Directors who vote to authorize an unlawful dividend are PERSONALLY LIABLE, JOINTLY AND SEVERALLY, to the corporation for the amount in EXCESS OF THE LAWFUL AMOUNT
–DEFENSE: not liable if he relied in GOOD FAITH on FINANCIAL STATEMENTS
What is the priority of distribution for something like a dividend?
1) PREFERRED SHAREHOLDERS
2) COMMON SHAREHOLDERS
What are preferred shares?
What are participating shares?
What are cumulative shares?
PREFERRED SHARES: get paid out first
–have a DIVIDEND PREFERENCE that says how much more they get than common shareholders
PARTICIPATING SHARES: you collect as preferred AND THEN PARTICIPATE AGAIN WITH COMMON SHARES
CUMULATIVE SHARES: you get this year’s and last year’s, e.g., if it wasn’t paid
Who can shareholders sell shares to, and when, and for how much, generally?
What are the two major exceptions to this rule?
GENERAL RULE: shareholders can sell shares to ANYONE at ANY TIME for ANY PRICE
exceptions:
1) closely held corporations
2) federal restrictions
What is a closely-held corporation?
Why would a closely-held corporation create restrictions on sale of securities?
what is required for a CH corp to restrict the sales of its securities?
are such restrictions enforceable?
what are challenges to such restrictions based on?
–what’s the test?
closely-held = generally between 50 and 100 shareholders
reasons for restrictions:
- -to prevent outsiders from becoming involved
- -so initial shareholders can retain control over the shares
REQS:
- -restriction must be CONSPICUOUSLY NOTED
- = certificate must contain either a FULL AND CONSPICUOUS statement of restriction OR statement saying there ARE RESTRICTIONS, which will be provided upon request
GENERALLY ENFORCEABLE
–BUT, even a lawful restriction MAY NOT BE USED against someone with NO KNOWLEDGE OF IT, UNLESS CONSPICUOUS
CHALLENGES based on restraint on ALIENATION
–test = REASONABILITY
What is a Rule 10b-5 action?
What is required to bring it?
What are the important parts of each element?
federal cause of action for FRAUDULENT PURCHASE/SALE of stock or other securities
for a PRIVATE PERSON to bring this action, reqs:
1) P has to have BOUGHT OR SOLD the security;
2) transaction involves INTERSTATE COMMERCE
3) D engaged in FRAUDULENT or DECEPTIVE conduct;
- -making an UNTRUE STATEMENT of material fact
- -FAILING to state a material fact that is NECESSARY to prevent statements already made from being misleading
- -OPINIONS and PREDICTIONS DON’T COUNT as untrue statements
4) conduct is related to MATERIAL information;
- -would a REASONABLE INVESTOR find that fact IMPORTANT in deciding to buy or sell the security?
5) D acted INTENTIONALLY OR RECKLESSLY
6) P RELIED on D’s conduct; and
7) P suffered HARM
- -OUT OF POCKET DAMAGES allowed: diff between stock’s value and price paid/received
- -NO PUNITIVE DAMAGES
What does section 16(b) say/do?
Necessary elements?
CORPORATE INSIDER can be forced to RETURN SHORT-SWING PROFITS to corporation
1) ONLY COMPANIES THAT HAVE:
- -securities traded on NATIONAL EXCHANGE; OR
- -assets of OVER $10 MILLION AND OVER 500 SHAREHOLDERS
2) CORPORATE INSIDER =
- -directors
- -officers
- -shareholders who hold more than 10% of any class of stock
3) TIMING:
- -made WHILE (or sometimes after) being a corporate insider
- -BEFORE INSIDER, DOESN’T COUNT
result/rule: during any SIX MONTH PERIOD, a corporate insider who BUYS or SELLS corp’s stock is LIABLE to corporation for ANY PROFIT made on those transactions
–insiders must REPORT CHANGES IN STOCK OWNERSHIP to SEC
What is the most important duty of shareholders?
What else do they do?
ELECT THE BOARD OF DIRECTORS
they also vote on major decisions that affect FUNDAMENTAL CHANGES in the corporation
What are the two kinds of meetings a corporation has of its shareholders?
What is required of a corporation in order to have these meetings?
What happens if there’s insufficient notice?
Which shareholders are able vote in the meetings?
ANNUAL MEETING: elect directors
SPECIAL MEETINGS: fundamental changes in life of corporation
–state law determines who may call these
NEED NOTICE!
- -must give notice 10 to 60 days before the meeting
- -must include time, date, and location
- -if it’s a SPECIAL MEETING, need to state the PURPOSE
Insufficient notice can allow a shareholder to challenge ANY ACTIONS TAKEN at the meeting
–WAIVED by actual attendance
ONLY shareholders who ACTUALLY OWN SHARES on the RECORD DATE can vote
- -set by DIRECTORS
- -must be NO MORE than 70 DAYS before meeting
Can shareholders ever take action without a meeting?
YES, by UNANIMOUS WRITTEN CONSENT of shareholders (impossible in big businesses, more of a closely-held corp thing)
Shareholders are allowed to send proxies to meetings
What is required for a vote of shareholders to be effective?
How many shareholders have to vote in favor of a proposal for it to go into effect?
QUORUM of the SHARES
- -NOT shareholders
- -quorum = MAJORITY of OUTSTANDING SHARES
- -START of meeting
NECESSARY VOTE = more votes for than against (abstentions don’t matter)
What is cumulative voting?
applies ONLY TO ELECTION OF DIRECTORS
corporation can CHOOSE to permit it in the ARTICLES
shareholders get the number of votes = their shares MULTIPLIED by number of director positions being voted on (so you can put all your votes behind one guy and have more of a say)
What rights do shareholders have to inspect the corporation’s records?
shareholder needs a PROPER PURPOSE
PP = related to shareholder’s FINANCIAL INTEREST in corp (not to harass officers)
What is a direct lawsuit by a shareholder against a corporation?
What about derivative litigation? What’s required of that?
What special damages can you get from a derivative suit?
DIRECT LAWSUIT: shareholder sues IN OWN NAME for damages, which go directly to shareholder
DERIVATIVE LAWSUIT: shareholder sues ON BEHALF OF CORPORATION, in CORP’S NAME over harm TO CORP (bad biz decision, typically), and damages go BACK TO CORP
Standing for derivative suit:
- -stockholder at time of harm
- -holds shares throughout litigation
- -fairly adequately reps interests of corp
Need to make a DEMAND to directors to bring the lawsuit first
–unless FUTILITY PROVISION in state law (it would be futile because, e.g., directors are named as defendants)
can get ATTORNEYS’ FEES if the litigation produces a “SUBSTANTIAL BENEFIT” to corporation
What duties does a shareholder owe to his fellow shareholders?
NOTHING!!! two exceptions:
CONTROLLING SHAREHOLDER may owe duty to minority shareholders when:
1) sale of stock to an outsider/looter: could be liable in selling stock to outsider set on looting/destroying company
- -red flags: had done it before, had given some indication
2) transactions between the corporation and controlling shareholder
- -owes duty of loyalty (e.g., sell real estate to company you control for a reasonable price)
CONTROLLING SHAREHOLDER = 50% + 1 share, OR a large part of a company with no other large owners
How many directors must a corporation have?
Who can be a director?
AT LEAST ONE
must be a NATURAL PERSON (no corporations)
When can directors be removed? by whom? exceptions?
GENERALLY, directors may be removed, BY SHAREHOLDERS, WITH OR WITHOUT CAUSE
exception: STAGGERED BOARD
- -classes of directors elected at different times
- -if articles provide, can only be removed FOR CAUSE
- -different classes of shareholders may elect different directors, who can only be removed by that class
exception: VACANCY or an INCREASE IN SIZE OF BOARD
- -can be chosen by shareholders at a special meeting OR
- -by the board of directors itself
Must directors be given notice of their meetings?
Does attendance waive notice?
Can directors proxy vote at their meetings?
NOTICE:
- -REQUIRED for special meetings
- -NOT REQUIRED for regular meetings
Attendance waives notice
–UNLESS director PROMPTLY OBJECTS at the meeting
NO PROXY VOTING
What is required for the board to vote?
What % vote is required?
Must there be a meeting to pass a resolution?
QUORUM = majority of total number of directors (unless bylaws say otherwise)
majority of PRESENT is enough to pass a resolution
board may approve a proposal without a meeting if agreed upon by UNANIMOUS WRITTEN CONSENT
What must a director do to avoid liability for a decision with which he disagrees?
must DISSENT in one of three ways:
1) entering dissent in MEETING MINUTES
2) file WRITTEN DISSENT BEFORE meeting ADJOURNS
3) provide written dissent by certified or registered mail to corp’s secretary IMMEDIATELY FOLLOWING adjournment of meeting
What duties are owed by directors and officers to the corporation?
DUTY OF CARE
DUTY OF LOYALTY
What is the business judgment rule?
What is the standard of care under the duty of care?
What defense is available against claims of violation of due care?
Directors and officers are protected from legal liability under this rule:
in the ABSENCE of FRAUD, ILLEGALITY, or SELF-DEALING, courts will NOT DISTURB GOOD-FAITH business decisions.
STANDARD OF CARE: act with care that a PERSON IN A LIKE POSITION would REASONABLY BELIEVE APPROPRIATE under SIMILAR CIRCUMSTANCES.
–special skills are expected to be used
DEFENSE: RELIANCE
–director or office is entitled to rely on expertise of officers and other employees, outside experts, and committees of the board
What is the duty of loyalty owed by directors and officers to the corporation?
How can a party insulate from a claim of violation of the duty of loyalty?
May not receive an UNFAIR BENEFIT to the DETRIMENT of the corporation WITHOUT:
- -effective DISCLOSURE, AND
- -RATIFICATION
these are typically SELF-DEALING transactions: when officer or their relative receives a SUBSTANTIAL BENEFIT DIRECTLY FROM CORP (e.g., salary)
also cannot USURP corporate opportunity
INSULATION: self-interested transaction may be upheld if it is DISCLOSED AND RATIFIED BY:
1) majority of disinterested DIRECTORS; OR
2) majority of disinterested SHAREHOLDERS
can also show that it was FAIR to insulate from liability
When can/must/must not a corporation indemnify its employees?
INDEMNIFICATION = paying cost of defense in ligation
MUST indemnify when director/officer SUCCESSFULLY DEFENDS THE CASE
CANNOT indemnify director/officer who is LIABLE for receiving an IMPROPER BENEFIT from the corporation or otherwise LOSES A LAWSUIT
MAY (but not required to) indemnify director/officer for costs of suit if director/officer:
1) acted in GOOD FAITH with no intent to harm corp; OR
2) had NO REASONABLE CAUSE to believe the conduct was ILLEGAL
What is required for a fundamental change to a corporation to happen?
approval of SHAREHOLDERS and DIRECTORS! BOTH!
What’s the difference between merger and consolidation?
merger = company a eats company b, still company a
consolidation = company a and company b become company c
When can shareholders have a corporation dissolved?
if they can show:
1) corporate assets are being wasted;
2) directors are acting fraudulently; OR
3) directors and shareholders are deadlocked
What is the process for a fundamental change occuring?
1) board must adopt a resolution proposing change
2) notice sent to shareholders of special meeting
3) majority of shareholders casting votes must vote in favor of fundamental change
What are appraisal rights?
if a shareholder doesn’t want to participate in an authorized merger, asset sale, amendment of articles, etc, he can get his shares PURCHASED by corporation at a FAIR VALUE as determined by court
process—shareholder must:
1) give written notice to corporation prior to vote
2) vote no or abstain
3) make prompt written demand for fair market value (can be determined by an expert appraiser)
