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Corporations Flashcards

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1
Q

Corporations - General Definition

A

A distinct legal entity that can conduct business in its own right by buying, selling, and holding property or by suing or being sued, and by lasting forever.

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2
Q

Why form a corporation?

A

Limited liability and promoting investment

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3
Q

Shareholder

A

Investors, ultimate owners of a residuary interest in a corporation

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4
Q

Directors

A

Elected by shareholders, responsible for major corporate decisions, appoint officers

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5
Q

Officers

A

Run the corporation on a daily basis

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6
Q

Promoters

A

Try to find investors who are willing to invest in the corporation, enter into Ks on behalf of the corporation (before it exists), promoters are fiduciaries of the corporation and can’t make secret profits

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7
Q

When is a corporation liable for a pre-incorporation agreement?

A

Promoters are personally liable for any contracts entered into before the corporation exists

Exception:

  1. Notation: special agreement that laters the default rule; it shifts liability from the promoter to the corporation
  2. An agreement between the promoter, the corporation,a Dan the third party
  3. Corporation is substituted for the promoter under the agreement
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8
Q

Incorporators

A
  1. Must sign and file the articles of incorporation and pay a fee
  2. Incorporators are not liable for Ks formed by promoters
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9
Q

Articles of Incorporation Requirements

A
  1. The name of the corporation, which must include: “corporation” “incorporated” or “limited or an abbreviation
  2. The agent of the corporation (name and address within the state of incorporation)
  3. The names and addresses of the incorporations
  4. The duration of the corporation (most are perpetual)
  5. The purpose of the corporation; and
  6. Authorized shares: must state the max number of shares of each class of stock that the corporation is authorized to issue
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10
Q

Ultra Vires Act

A

Acts beyond the powers of the corporation

-If the corporation acts outside of its stated purpose, the acts will be held unenforceable

  • Shareholders can sue to enjoin an ultra fires action
  • Corporation can take action against ultra fires directors or officers
  • The state can initiate proceedings to enjoin such actions
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11
Q

When does limited liability begin?

A

When the Secretary of State accepts the fee and files the articles of incoporation

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12
Q

Bylaws

A

Set fort the day-to-day rules regarding the operation and management of the corporation

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13
Q

Who can amend bylaws?

A

Board of Directors typically

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14
Q

Who can amend articles of corporation?

A

Shareholders

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15
Q

What happens if bylaws and articles conflict

A

Articles win

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16
Q

De Jure Corporation

A

When all of the statutory requirements for incorporation have been satisfied

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17
Q

De Fact Corporation

A

Corporation will still be treated as a corporation, with limited liability, if the organizers:

  1. Made a good faith effort to comply with the incorporation process; and
  2. Have no actual knowledge of a defect in the corporate status
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18
Q

Veil Piercing

A

A court may “pierce the veil” of limited liability for the corporation to avoid fraud or unfairness

Three Factors:

  1. Alter ego: the investor or shareholder has failed to observe any corporate formalities between the person and the corporation - treated the company just like itself (mixing of personal and corporate funds)
  2. Self-dealing can be a factor
  3. Under Capitalization: failure to maintain funds sufficient to cover foreseeable liabilities
  4. Fraud: the parties engaged in fraud or fraud-like behavior
    * More likely to pierce the veil in tort situations rather than K situations
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19
Q

What is a stock?

A

Ownership in a company is represented by shares of stock, carries voting attributes, and economic rights

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20
Q

Creditors

A

Hold the debt of the corporation (only entitled to repayment of debt plus interest)

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21
Q

Stockholders

A

Entitled to All the value that remains in a corporation after the debts have been paid

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22
Q

Preferred Stock

A

Has preference over common stock with respect to dividends, and liquidation (but a secured creditor will generally take priority over even preferred shareholders)

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23
Q

Classes of Stock

A

Corporations can have as many classes as they choose, with different voting and economic rights

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24
Q

Authorized Shares

A

Maximum number of shares that the directors of a corporation can sell, set in articles of incorporation, need shareholder approval to sell more

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25
Q

Issued Shares

A

Number of shares from the authorized pool that the directors have actually sold

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26
Q

Outstanding Shares

A

Shares that were once issued to shareholders and still remain int he possession of the shareholders (only voting share)

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27
Q

Treasury Shares

A

Reacquired issued shares

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28
Q

Par Value Stock

A

Minimum value set by corporation at which it can sell stock, typically not required today

29
Q

Valuation of Consideration

A

Corporation can receive any valid consideration that the board of directors deems adequate, directors have discretion

30
Q

Watered Stock

A

The corporation sets a par value amount and sells the stock for less than the stated amount

31
Q

Stock Subscriptions

A

-Ask people to agree in advance to buy stock before the corporation is formed. Prior to incorporation, subscription agreements are irrevocable for up to 6 months

32
Q

Preemptive Rights

A

Right to acquire to maintain the percentage of ownership any time new shares are issued

*Generally shareholders DO NOT have them unless negotiated or included in the articles

33
Q

Dividend

A
  • Board of Directors has the power to issue dividend
  • Board cannot declare dividends in two circumstances: corporation is insolvent or if by issued dividend, the corporation would become insolvent
  • 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
  • BUT a director will not be liable if he relied in good faith on financial statements
34
Q

Priority of Distribution

A

(Who gets what from a dividend)

  1. Cumulative referred shares, can get a preferred dividend for the year a dividend was paid plus the year before where a dividend was not paid, then common stock
  2. Participating Preferred Shares (get a preferred dividend first and then the common stock + preferred shares get to split the remainder of the pot)
  3. Preferred Shares, get their dividend preference first, then the common shares receive the remaining pot
  4. Outstanding common stock - split the pot evenly
35
Q

Closely Held Corporations (Fewer than 100 shareholders) (Private Restrictions on the Sale of Securities)

A
  • To prevent outsiders from becoming involved isn’t he corporation, or the initial shareholders can retain control over the shares
    1. Restrictions must be Conspiculously Noted (on the stock certificate or something that states there are restrictions that will be provided upon request)
    2. Enforceability: cannot be enforced against someone with know knowledge of it unless restriction is certified and conspicuous
    3. Types of Restrictions: A) outright prohibition on transfers; B) requires company’s consent; C) company has an option to buy shares first; D) company has an outright refusal
    4. Challenges to restore tons: usually made on the basis of restraint on alienation, test is one of reasonability,
    5. Anyone who agrees is bound to the restrictions
36
Q

Rule 10b-5

A

Fraudulent purchase or sale of stock or other securities (like bonds or portions)

  1. Fraudulent or Deceptive Conduct: making an untrue statement of a material fact, or failing to state a material fact that is necessary to prevent statements already made from being misleading, exception: opinions and predictions
  2. Materiality: if a reasonable investor would find that fact important in deciding to purchase or sell the security
  3. Scienter: intentional/reckless
  4. Harm: causal connection between conduct and harm
  5. Computing damages: 1) out of pocket: difference between the stock’s price the plaintiff paid or received, no punitive damages allowed
37
Q

Who may bring a 10b(5) Action

A
  1. P has to have purchased or sold the security;
  2. Transaction involves interstate commerce
  3. Defendant engaged in fraudulent or deceptive conduct
  4. Conduct related to material information
  5. Scienter
  6. p relied on d’s conduct
  7. P suffered harm
38
Q

16(b)

A
  • A corporate insider can be forced to return short-swing profits to the corporation
    1. Only applies to corporations with securities traded in a national securities exchange OR corps with assets of more than $10 million and more th an 500 shareholders
39
Q

Who is a corporate insider?

A

Directors, officers, shareholders who hold more than 10% of any class of stock

*before corporate insider, generally no issues, after? There may be

40
Q

Short-Swing Profits

A

During any six month period, a corporate insider who both buys and sells the corporations stock is liable to the corporation for profits made on those transactions

Corporate insiders must report changes in stock ownership to the SEC

41
Q

Shareholder Meetings

A
  1. Annual Merting; every corporation must hold an annual meeting to elect directors and conduct other shareholder business
  2. Special Meetings: may be called to vote upon fundamental changes, state law specifies who can call them
  3. notice:: shareholders must be given notice of either type of meeting no fewer than 10 days and no more than 60 days before the meeting, must include time, date and location, for special meeting must include purpose. Insufficient notice can allow a shareholder to challenge any actions taken at the meeting (waiver of notice: can be waived by actually attending)
  4. Record date, determines who is eligible to vote at meetings, director must set a record date, must be no more than 70 days before the meeting, only shareholders who actually own shares in the record date are entitled to vote
42
Q

Unanimous Written Consent

A

Shareholders may take any action without a meeting by unanimous written consent

43
Q

Proxy

A
  1. Allows large corporations to deal with meeting logistics, authorizes others to vote shares in accordance with thr wishes of the shareholde

Proxy must be: 1) in writing; 2) signed by the shareholder as of the record date; 3) be sent to the secretary of the corporation ; 4) state that it authorizes another to vote the shareholders shares; and cannot Be valid for more than eleven months unless otherwise specified

44
Q

Shareholders typically vote on

A
  1. Election of directors
  2. Mergers
  3. Share exchanges
  4. Amendments to the articles of incorporation
  5. Sales of all or substantially all of its assets; or
  6. Dissolution
45
Q

Quorum

A

-For the vote to be effective, a quorum of the corporations SHARES must be represented at the meeting, in person or via proxy, quorum is a majority of the corporations outstanding shares represented at the start of the meeting

If a quorum is present, a shareholder vote is effective if the votes cast in favor of the proposals exceed the votes cast against the proposal

46
Q

Cumulative Voting

A

Applies only to the election of the board of directors and has to be authorized by the Articles of Incorporaiton

Shareholders are given a number of votes that is equal to the number of shares they have multiplied by the number of directorr positions being voted on, can be spread around or put on one director

47
Q

Shareholder Inspection of Rights

A

A shareholder may inspect the corporation’s records in person or through an agent as long as the shareholder states a proper purpose for doing so. (Improper would be harassing the corporate officers)

48
Q

Direct Lawsuits

A
  • When a shareholder sues the corporation in his own name for damages
  • Can only sue directly if they have been harmed directly
49
Q

Derivative Suit

A

Shareholder is suing on behalf of the corporation, and alleging that the corporation has been harmed. Must be named in corporation’s name and any recovery belong to the corporation.

  1. Standing: Must maintain contemporaneous stock ownership (must have been a shareholder at the time of harm, must hold shares throughout litigation, and must fairly and adequately represent the interests of the corporation)
  2. Demand Requirement, generally required to first demand that the BOD bring the lawsuit in the corporation’s name before the shareholder can bring the suit, demand futility provision - demand is not required if it would be futile
  3. Recovery: any recovery goes to the corporation, not the shareholder. If litigation produces a “Substantial benefit” to the corporation, the plaintiff’s attorneys are entitled to have their fees paid by the corporation
50
Q

Duties of a Controlling Shareholder

A
  • May owe a fiduciary duty to minority shareholders in two circumstances:
    1. Sale of Stock to an Outsider: when they sell stock to an outsider intent on looting or destroying the company
    2. Controlling shareholder transacts with the corporation: receives a special distribution or otherwise conducts major business transactions to his own benefit owes a duty of loyalty ex: rent real estate to the corporation

Anyone controlling 50 percent of a corporation’s shares, plus one, is automatically a controlling shareholder. Although shareholders do not owe fiduciary duties to the corporation or to each other, a fiduciary duty to the minority shareholders may arise if the controlling shareholder is (i) selling that interest to an outsider, (ii) seeking to eliminate other shareholders from the corporation, or (iii) receiving a distribution denied to the other shareholders. A controlling shareholder also has a duty to disclose to the minority shareholder any information that it knew or should have known if it is information that a reasonable person would consider important in deciding how to vote on a transaction.

51
Q

Who is a controlling shareholder?

A

Own a majority of the stock or is a widely held corporation with an average investment of 0.1% and this guy owns 10%

52
Q

Board of Directors (Number, Qualifications, Term, Selection, Removal, Replacement

A
  1. A corporation must have at least one director, natural persons
  2. Elected by shareholders, serve for a limited term, usually one year
  3. May be removed with or without cause, except if its a STAGGERED board where there are classes of directors elected at different times (may only be removed for cause if the articles provide; and different classes of shareholders may elect different directors, so only directors of their class can remove them)
  4. New director can be chosen by the shareholders at a special meeting or by the board itself
53
Q

Board Meetings

A
  • Directors meet regularly
  • Must be given notice for special meetings, but not for regular meetings
  • Attendance at meeting waives notice, unless director promptly objects at the meeting, directors cannot vote via proxy or enter into voting agreements
54
Q

Board Meeting Voting Requirements

A
  1. Quorum: a majority of the total number of the directors, unless the bylaws specific a higher or lower number
  2. Affirmative Vote: as long as a quorum is present, a resolution of the board will pass upon a majority vote of those present at the meeting
  3. Unanimous written consent a, lowed
  4. Dissent: to avoid potential liability for a board decision with which a director disagrees, the director must dissent by: entering dissent in the meeting minutes, file written dissent before the meeting is adjourned; or provide written dissent by certified or registered mail to the corporation’s secretary immediately following the adjournment of the meeting
55
Q

Officers

A
  1. Selected by the board
  2. Run the company day to day
  3. Typically consists of a president, secretary, and treasurer
  4. Owe fiduciary duties of loyalty and care
56
Q

Duty of Care

A

Directors and Officers Owe a Fiduciary Duty of Care to the Corporation

Business Judgment Rule: In the absence of fraud, illegality, or self-dealing, courts will not disturb good-faith business decisions.

Standard: Act with the care that a person in a like position would reasonably believe appropriate under similar circumstances, special skills are expected to be used

Reliance Defense: a director or officer is entitled to rely on the expertise of officers and other employees outside experts, and committees of the baord

57
Q

Duty of Loyalty

A
  • Officers/Directors: may not receive an unfair benefit to the detriment of the corporation without effective disclosure and ratification
    1. Self-dealing transactions: director, officer, or their relative receives a substantial benefit directly from the corporation
    2. Corporate Opportunity Doctrine: usurping or stealing a corporate opportunity
    3. Insulation from Laibiltiy.Ratification: A self-interested transaction may be upheld if it is disclosed and ratified by: 1) a majority of disinterested directors; or 2) a majority of disinterested shareholders (ratification doesn’t always with he case, may only shift the burden)
    4. Fairness: If a director or officer can demonstrate that the transaction was fair, then they will win
58
Q

Required Mandatory Indemnification

A

The corporation is always required to pay the costs of defense if the director or officer successfully defends the case

59
Q

Prohibited Indemnification

A

Can’t do it if liable for receiving an improper benefit form the corporation or otherwise loses a lawsuit

60
Q

Permissive Indemnification

A

May do it if the director or officer acted in good faith with no intent to harm the corporation; or had no reasonable cause to believe the conduct was illegal

61
Q

Types of Fundamental Changes to a COrporation

A
  1. Required Approval: both shareholders and directors must approve fundamental changes
  2. Merger and Consolidation: the combination of two or more corporations where one corporation survives and assumes the assets and liability of the other corporation
  3. Consolidation: the combination in which neither of the two corporations survives, new entity is created, and assumes debts/assets of both corporations
  4. Dissolution: Corporation’s existence is extinguished voluntarily by the shareholders and the directors or involuntarily (creditors or shareholders if they can show corporate assets are being wasted, directors are acting fraudulently, or directors and shareholders are deadlocked)
62
Q

Process for Dissolution

A
  1. Board must adopt a resolution proposing the change; notice must be sent to the shareholders of the special meeting; and
  2. A majority of the shareholders casting a vote must vote in favor of the fundamental change
63
Q

Dissenters Rights or Appraisal Rights

A

-If a shareholder does not wish to participate in a duly authorized merger, asset sale, share exchange, or amendment of the articles, the shareholder is entitled to dissenters’ or appraisal rights, entitled to have their shares purchased from them by the corporation at a fair value determined by the court

Procedurally:

  1. Shareholder must send written notice to the corporation prior to the vote of her intent to dissent
  2. At the meeting, the shareholder must abstain or vote no at the meeting; and
  3. The shareholder must make prompt written demand for FMV after the action has been approved ( if they disagrees as to what FMV is they can hire an appraiser)
64
Q

Close Corporations

A
  1. A corporation with a few shareholders
  2. Generally, shareholders are often also directors and officers, typically not public aly traded, relaxation of rigid rules
  3. Can form voting agreements
  4. Preemptive rights, default rule prohibiting preemptive rights may be relaxed
65
Q

S Corporation

A

Gets special treatment for tax purposes, only taxed once like a partnership, S corporation is limited in the number of shareholders it may have

66
Q

Limited Liability Company

A
  • LLC combines the limited liability of corporations with the tax treatment of a partnership, generally no limitations on number of shareholders, no residency requirements, and no natural person requirements
    2. Key Characteristics: File Articles of an Organization and an operating agreement with the state; owners are called members,r at her than shareholders LLC is presumed to be managed by ALLL of its members but that can be changed
    3. Legally, they are treated like corporations, difference in terminology and taxing features, but otherwise, analyze LLCs under general corporate law principles
67
Q

Business Judgment Rule

A

The business judgment rule acts as a safe harbor for directors. Under this rule, courts will not second-guess a business judgment if, at the time it was made, it was informed, reasonable (based on sound business judgment), and made in good faith. It is a rebuttable presumption that a director reasonably believed that his actions were in the best interest of the corporation. Directors will still be liable for decisions that are grossly negligent or reckless.

68
Q

Distribution of Assets Upon Dissolution

A

The directors of a corporation are responsible for distribution of the corporate assets and may be liable for improper distributions.

Such assets must be distributed in the following order:

  1. Creditors of the corporation to pay the debts and other obligations of the corporation, including bona fide obligations owed to shareholders;
  2. shareholders of stock with preferences in liquidation; and shareholders of other stock.
  3. Secured creditors usually will have priority over unsecured creditors.

Courts may consider whether the creditors actions led to the company’s dissolution and subordinate their interest.

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