Corporations

Question 2

What is the governing body of law for TExas corporations?

Answer 2

The Texas Business Organizations Code

Question 3

What is required to form a corporation?

Answer 3

People, paper, and action

Question 4

Who is required to start a corporation?

Answer 4

Organizers: people that execute the certificate and deliver it to the secretary of state. does not have to be a resident and it can be an entity

Question 5

What document is required for formation?

Answer 5

A certificate of formation, which is a contract between the corporation and the state and the corporation and the shareholders.

Question 6

What information is required to be on the certificate of formation?

Answer 6

1). The corporation name, which must have Inc. Co. or Corp. It cannot be “Bank.”2). Name and addresses of each organizer3). the number of initial directors4) The names and number of each initial director or whoever will manage it.5). The name an PO Box of the registered agent6). A statement of purpose.8). Authorized stock, number of shares per class, and information on par value, voting rights, and class preferences.7). Duration if limited, otherwise it’s perpetual.

Question 7

What rules are there on the name of a corporation?

Answer 7

It cannot have “bank” in the title.You can reserve a name with the secretary of state for up to 120 days before formationIf the corporation does business under a name besides the one on the certificate, then it must file an assumed name certificate with the Secretary of State.

Question 8

What happens if the corporation begins operating outside its formation purpose?

Answer 8

Then the corporation is operating Ultra vires, and any contracts ultra vires are void, the shareholders can seek an injunction, and the responsible manages are liable to the corporation for the ultra vires losses.

Question 9

What is authorized stock?

Answer 9

The maximum number of shares the corporation can sell

Question 10

What is issued stock?

Answer 10

Shares of stock that the corporation actually sells.

Question 11

What is outstanding stock?

Answer 11

shares the corporation has issued and not reacquired.

Question 12

What actions are required for formation?

Answer 12

The organizers sign the certificate, give it to the Sec. of STate, and pay the fee. The Secretary files it and sends acknowledgment of filing back to the corporation. The filing effectually forms a de jure corporation, whether it was properly filled out or not.

Question 13

What must the corporation do after filing?

Answer 13

The board must have an organizational meeting where the board selects officers, adopts bylaws, and transact any other company business. It requires 3 days notice.

Question 14

What are the affairs of the corporation governed by?

Answer 14

By Texas law, whether it does business here or not. This is tthe internal affairs doctrine.

Question 15

How are corporations taxed?

Answer 15

There is normally a double tax: income tax paid by the corporation, and shareholder pay on their dividends. S corporations, however don’t pay income taxes.

Question 16

What is an S corporation?

Answer 16

A closely held corporation with 100 or fewer shareholders, all of whom are us citizens or residents, and it only has one class of stock that is not publicly traded.

Question 17

What is a de facto corporation?

Answer 17

When a corporation is not de jury and 1). The person asserting the doctrine is unaware of the failure to form a de jure corporation2). there is a relevant incorporation statute–the TBOC3). The parties made a good faith colorable attempt to comply with it, and4). They have done some exercise of corporate privileges, acting like we have a corporation. Then the business is treated like a corporation for all purposes. THIS may be abolished in Texas.

Question 18

What is corporation by estoppel?

Answer 18

When a person deals with an entity that acts like a corporation and you treat it as a corporation, like by writing checks to it, then that person can be later estopped in contract claims from asserting there is no corporation. This may be abolished in Texas.

Question 19

What are bylaws?

Answer 19

Internal documents governing the corporation that the corporation must have, but it is not required to be kept with the Secretary. They are adopted at the board at the organizational meeting.

Question 20

How can bylaws be changed or repealed?

Answer 20

By the board or the shareholders, unless the certificate reserves this to the shareholders exclusively.

Question 21

If bylaws and the certificate conflict, which wins?

Answer 21

The certificate.

Question 22

What is a promoter?

Answer 22

A person actin on behalf of a corporation not yet formed. The promoter is liable for pre-formation contracts until there is a contractual novation, agreeing that the corporation replaces the promoter in the contract.

Question 23

Is a corporation liable for pre-formation contracts by a promoter?

Answer 23

No, not until it adopts the contract expressly by board action, or implicitly by accepting the benfits of the contract.

Question 24

What is a foreign corporation?

Answer 24

any company incorporated outside Texas. Foreign companies must qualify to do recurring business in Texas and pay prescribed fees to obtain a certificate of authority from the Secretary. Otherwise it pays a civil fine and cannot sue in Texas for a claim arising in Texas.

Question 25

What is issuance?

Answer 25

When a corporation sells its own stock.

Question 26

What is a subscription?

Answer 26

A written signed offer to buy stock from a corporation. He cecomes a shareholder when he pays for the stock. Consideration for stock and be any tangible or intangible benefit to the corporation.

Question 27

Are subscriptions revokable?

Answer 27

yes, unless they are accepted by the corporation and the corporation notifies the subscriber in writing.

Question 28

What is par for corporations?

Answer 28

The minimum issuance price of stock. The stated capital is the par value of the issuance. The excess over par gets put into surplus which can go into distributions.

Question 29

What is treasury stock?

Answer 29

Stock that was previously issued that has been reacquired by the corporation. it is authorized and issued, but not outstanding. When the corporation resells treasury stock, it can be below par, because par is the minnimum ISSUANCE price.

Question 30

What happens if stock is issued for less than par?

Answer 30

It is considered Watered Stock, and the corporation’s directors are liable for the amount to get up to par if they knowingly authorized it. Also the buyer is liable for the amount and charged with notice. A third party transferee is not liable if he acts in good faith.

Question 31

What are pre-emptive rights?

Answer 31

The right of an existing shareholder to maintain his percentage of ownership by buying stock whenever there is a new issuance–counting treasury stock–of stock FOR MONEY. NOTE THAT THE DEFAULT IS THAT SHAREHOLDERS DO NOT HAVE PRE-EMPTIVE RIGHTS, unless in the certificate of formation.

Question 32

Who can be a director?

Answer 32

Natural persons only.

Question 33

How are directors elected and removed?

Answer 33

Elected at the annual meeting unless bylaws give classified board (classes of rotating halves or thirds each year), and removal by shareholder majority with or without cause.

Question 34

How does the board take an act?

Answer 34

1). by unanimous written consent2). a meeting or simultaneous communication with quorum and voting requirements

Question 35

Is Notice required for baord meetings?

Answer 35

No, not for the regular meetings, but special meetings must state the time and place. Notice can be by email if the board member allows it.

Question 36

Board member voting restrictions?

Answer 36

Board members cannot give proxy votes, nor can they do voting agreements.

Question 37

What is a quorum of the board?

Answer 37

A majority of board members, which is necessary to do business. If there is a quorum there, then a majority of those present can vote for a resolution to pass.

Question 38

What duties does a board member owe the corporation?

Answer 38

The duty of care and the duty of loyalty. Also, no improper loans, improper distributions

Question 39

Describe the duty of care?

Answer 39

The plaintiff’s burden to show that the director did not act in good faith and exercise ordinary care and prudence as a prudent person would in similar circumstances. This may include not acting (nonfeasance) or acting (misfeasance). A COURT WILL NOT SECOND GUESS A BUSINESS DECISION IF IT WAS MADE IN GOOD FAITH, WAS INFORMED, AND HAD A RATIONAL BASIS

Question 40

Describe the duty of loyalty?

Answer 40

The director’s burden to act in good faith and wit ha reasonable belief that he is acting in the corporation’s best interest. It applies in conflict of interest cases. Directors cannot compete with the corporation without the approval of a majority of disinterested directors. Otherwise, a constructive trust is imposed on the competing business’s profits.

Question 41

What is an interested director transaction?

Answer 41

Any deal between the corporation and one of its directors, his relatives, or another business he is a manager of or has a financial interest in. Interested transactions are set aside unless the director shows the deal was fair to the corporation when approved or his interest and the material facts were disclosed or known and the deal was approved in good faith by the shareholders or a majority of disinterested directors.

Question 42

What is a corporate opportunity?

Answer 42

Anything the director has reason to know the company would be interested in. If a director participates in a cop orate opportunity, then its profits go into a constructive trust, unless the board renounces the opportunity in the Certificate of ofrmation or by board action.

Question 43

What is an improper loan.

Answer 43

A loan to a director not reasonably expected to benefit the corporation, like for the director’s education.

Question 44

Which directors can be liable?

Answer 44

A director is prsumed to have concurred with the Board unless he1). is absent 2). puts his dissent in writing in the minutes, files a note with the corporation secretary at the meeting or sends the secretary a registered letter immediately after the meeting 3). has good fiath reliance on financial or other information given by an officer or competent professional,

Question 45

What are officers of a corporation?

Answer 45

The corporation’s agents that bind the corporation with their authority. They are selected and removed by the board (not by shareholders) at will, though there may be contact damages.

Question 46

What officers are required for a corporation?

Answer 46

The president and secretary.

Question 47

When can a corporation indemnify its directors or officers?

Answer 47

Not when the director/officer is held liable for will for or intentional misconduct in a corporation duty–even if certificate says otherwise. It is required when the director/officer wins any kind of judgment on the entire case. It is allowed any other time–mostly settlements– as long as she did not breach the duty of loyalty according to a majority of disinterested directors/comittee/shareholders, or independent legal counsel. But if he is liable to the corporation or received an improper personal benfit, then he only gets expenses and attorney’s fees. Or a court can order reimbursement, subject to the not liable to the corporation requirement.

Question 48

How is a close corporation managed?

Answer 48

by a board or by the shareholders, or by a particular person. Whoever is managing owed the duty of care and loyalty

Question 49

how is the management structure of a close corporation changed?

Answer 49

Changes in the management structure are done by shareholder agreements authorizing the change, with 1) approval by all shareholders and placement in the certificate or 2). written agreemtn by all the shareholders.

Question 50

How are close corporations formed?

Answer 50

The same as a regular corporation, but with the indication on the certificate stating that it is a close coporation. The stock certificates should also note the close corporation status.

Question 51

What is a statement of operation?

Answer 51

Once shareholders in a close cop ration start operating under the shareholders agreement, it can file the statement of operation with the Secretary, which makes the change a matter of public record and thereby binding on subsequent transfers.

Question 52

What duties do close corporation shareholder owe each other?

Answer 52

As a matter of law, shareholders doe not owe fiduciary duties, but a court may find it when there is a freezing out of minority shareholders, selling control without reasonable investigation to one who loots the company, or selling corporate assets for personal profit. These may all amount to oppression in a close corporation.

Question 53

When might a court pierce the coroprate veil?

Answer 53

When shareholders have abused the privilege of incorporation or limited liability would be unfair. To prevent fraud or to achieve equity. This only happens is close corporations, and it is especially applicable to alter ego theory and undercapitalization (lack of protection, insurance, etc.). It is more likely in tort, not in contract.

Question 54

What is a derivative suit?

Answer 54

The shareholder brings suit for the corporation. Ask “could the corporation have brought this suit?”

Question 55

Who can bring a derivative suit?

Answer 55

One who owned stock when the claim arose or got it by inheritance or divorce from someone who did. He must own the stock throughout the litigation He must make a written demand on directors with the nature of the claim in particularity, then wait 90 days unless waiting would cause irreparable damage to the corp.

Question 56

Settlement of a derivative suit?

Answer 56

Can only be with court approval, and the court may require notice to the shareholders if it would substantially affect them.

Question 57

Dismissal of a derivative suit?

Answer 57

Can be brought if the suit is not in the corporation’s best interest. The court must dismiss if the decision was made in good faith by the independent, disinterested shareholders.

Question 58

Who pays fees and damages for derivative suits?

Answer 58

The corporation recovers the damages from these suits and the shareholder that brought it recovers fees and expenses from the corporation, IF he wins. The shareholder can also be liable for the director’s attorney’s fees if the suit was without reasonable cause or for an improper purpose. For a close corporation of 35 or less shareholders, the court might treat it as a direct action with recovery going to the shareholder and dismissal requirements don’t have to be met.

Question 59

What shareholders vote?

Answer 59

The shareholders on record as of the record date–even deceased holder’s estate. Except treasury stock does not vote.

Question 60

What is a proxy?

Answer 60

A writing signed by the record shareholder to the corporation secretary authorizing someone else to vote based on agency principles.

Question 61

How long are proxies good for?

Answer 61

11 months unless they say otherwise. Or they can be revoked. A proxy coupled with an interest is not revokable. That is a proxy that says it’s irrevocable and the proxyholder has some interest in the sahres other than voting.

Question 62

What is a voting trust?

Answer 62

An actual trust:1). a written trust agreement controlling how the shares will be voted2). file a copy with the corporation3). transfer legal title to the trustee4). give trust certificates and other shareholder rights besides voting to shareholders.

Question 63

What is pooling in voting?

Answer 63

a written agreement between shareholders to vote with a copy sent to the corporation. They are enforceable against transferees as long as it’s conspicuous on the stock cert.

Question 64

How can shareholders do a corporate act?

Answer 64

1). unanimous consent in writing and signed (or electronic), OR2). A meeting with quorum and voting rights. The same as the board’s actions

Question 65

Describe shareholder meetings?

Answer 65

There is an annual meeting for electing directors (if there isn’t one for 13 months, a shareholder can get a court to require it)And there can be a special meeting called by the board, the president, 10 percent of vote-eligible shareholders or anyone else permitted in certificate.

Question 66

Shareholder meetings’ notice?

Answer 66

The must be notice by every meeting between 10 and 60 days before stating when, where, and the meeting’s purpose, which the meeting cannot go outside of. Failure to give notice makes actions at the meeting void unless the non-noticees give written waiver or attend the meeting.

Question 67

How does cumulative voting work?

Answer 67

Each shareholder gets votes equal to the number of director positions times his number of shares.

Question 68

Describe voting proceedure for shareholders.

Answer 68

There must be a quorum of outstanding shares. Once a quorum is established, it is not lost if people leave, unlike director quorums. Once a quorum is present a majority of votes cast binds the corporation.

Question 69

Can stock be restricted to transfer?

Answer 69

Yes, in the certificate, bylaws, or by agreement, as long as they are not an undue restraint on alienation. A right of first refusal (offer to the corporation before selling) is allowed.

Question 70

When can shareholders inspect books and records?

Answer 70

When he has owed stock for at least 6 months or has 5% of outstanding shares. Otherwise, he needs a court order from a written demand with a proper purpose related to your interest as a shareholder. Any director has a right to inspect.

Question 71

When are shareholders entitled to a distribution?

Answer 71

When the board declares it.

Question 72

What is preferred stock?

Answer 72

It has a set dividend and pays first, before common. Participating preferred gets its set dividend and participates in the common dividend. Cumulative deferred gets past due dividends when the corporation doesn’t pay declared dividends.

Question 73

What funds may be used for distributions, including dividends, repurchase, and redemptions?

Answer 73

the surplus: assets, minus liabilities, minus stated capital. The stated capital is the par value of the issuance. The excess over par gets put into surplus which can go into distributions. Directors are jointly and severally liable to the corporation for unlawful distributions the amount is is impermissible.

Question 74

When can a corporation not pay distributions?

Answer 74

When it is insolvent: unable to pay debts as they come due.

Question 75

How can a fundamental corporate change be done?

Answer 75

1). the board takes an action adopting resolution for a fundamental change.2). The board submits the proposal to the shareholders3). The fundamental change must be approved by 2/3 of the shareholders entitled to vote.4). Usually a document is delivered to the Secretary for filing..

Question 76

What is a right of appraisal?

Answer 76

The right of a dissenting shareholder to force the corporation to buy your stock for fair value when the stock is not on a national exchange and has less than 2000 shareHOLDERS, and 1). merger2). sale of shares in a share exchange3). transfer of substantially all the assets, or 4). conversion.

Question 77

How does a shareholder perfect the right of appraisal?

Answer 77

1). before the shareholder vote, file with the corporation written notice of objection and intent to demand payment2). Abstain or vote against the proposed change, and3). After the vote, within 20 days, make written demand to be bought out.

Question 78

How can a certificate of formation be changed?

Answer 78

With board of director action AND 2/3 shareholder approval. Then give the amdended certificate to the Secretary.

Question 79

What is required in mergers?

Answer 79

Both corporations’ boards must take action and the disappearing corporation must have 2/3 approval. The surviving corporation shareholders don’t vote unless it’s a fundamental change for them.

Question 80

What is a short form merger?

Answer 80

When a 90% or higher subsidiary is merged into the parent. Then no shareholder approval is required.

Question 81

What is a conversion and how is it done?

Answer 81

When a corporation converts to another business organization form. It requires board action and 2/3 shareholder approval and delivery of certificate of conversion.

Question 82

What is a transfer and how do you do it?

Answer 82

The most testable fundamental change: when there is a sale/lease/exchange of all or substantially all of the assets of a corporation. This is fundamental to the seller, not the buyer. It requires board of director action from both corporations, and 2/3 voting from the selling shareholders

Question 83

What is a voluntary termination?

Answer 83

A dissolution of the corporation, requiring1). written consent of all shareholders or2). board approval and 2/3 shareholder vote3). notice of intent to terminate to creditors4). liquidation process5). But a court can revoke for fraud

Question 84

Who can seek involuntary termination?

Answer 84

1). The Texas AG can instate it for fraudulent procurement of certificate, ultra vires activities, or misrepresentation in reports, or public interest requires it.2). Creditors can seek it for irreparable harm to unsecured creditors.3). Creditors can seek appointment of a receiver because the corporation is insolvent and it has an unsatisfied judgment or the company admits in writing that the amount is due4). a shareholder can seek appointment of a receiver for insolvency, waste of assets, deadlock causing irreparable harm to the company… Receivers last 12 months

Question 85

What is an administrative termination?

Answer 85

The Secretary can issue a certificate of termination for a failure to pay fees, maintain a registered agent, or file required reports. To corp. gets at least 90 days. The Secretary can reinstate with compliance, but until it does, directors are personally liable for debts incurred by the corporation after the termination.

Question 86

What is termination?

Answer 86

The beginning of the process of liquidation. It can be voluntary, involuntary, or administrative.

Question 87

Describe the liquidation process

Answer 87

1). Gather all the assets and convert them to cash2). pay the creditors3). give remainder to shareholders or liquidation preference. The board controls this unless a court decides to. After liquidation, the corporation sends a certificate of termination to the Secretary with a statement that debts have been paid and reminder distributed. Upon filing, this ends the corporate existence.

Question 88

After a corporation terminates, what is the SOL for claims against it?

Answer 88

3 years.