Corporations Flashcards
Incorporation: promotors
function and duty
Promotors are people finding investors for corp and enters into K on behalf of the nonexistent corp.
Promotors are fiduciaries to corporation—cannot make secret profits
Incorporation: promotors’ liability
general rule
exceptions
Personally liable for K entered into before incorporation
© Novation: agreement by promotor, corp, and 3rd party will shift liability to corporatio
© Adoption: if corp takes the benefits of the contract, promotor not liable
Incorporation: Incorporation start date
Incorporation– begins when secretary of state accepts fee and files the articles of the incorporation.
When a corporation has not been created, the entity may be treated as a general partnership.
Incorporation: Article of incorporation content
corporation name, agent info, incorporator info (and signed by incorporator)
purpose,
authorized shares.
duration.
bylaws not required
Only SH can amend
Ultra vires
If the corp or director/officer/employee acts outside of the corporation’s stated purpose in the articles of incorporation, SH, corp, or state can enjoin
Incorporation: De facto corp
A defective corp will be treated as a corp if organizers
(a) made a good faith effort to incorporate and
(b) have no actual knowledge of a defect in corp status
Incorporation: Corp by estoppel
Third party is estopped from asserting defect if organizers (a) made good faith attempt to incorporate, and (b) the third party entered into a K as though it was properly incorporated,
Corporate governance: director requirement
A corp must have at least one director, director must be a natural person.
Corporate governance: director appointment
general appointment authority
replacement authority
Elected by SH, for 1 year usually © staggered.
© Director replacement/increase in #: Board or SH can choose
Corporate governance: director removal
Removable by SH with or without cause © for cause if articles specify
Board meeting: Notice requirement
Rule
Waiver rule
2-day notice required for special meetings but not regular meetings.
© attendance waives notice unless director attends and promptly objects
Board meeting: voting requirement
voting requirement
voting agreement
Quorum and affirmative vote (majority vote of those present).
Proxy/Voting K prohibited.© close corp can have voting agreements.
Board meeting: quorum
Majority of total # of directors must be present unless specified otherwise in bylaws
Board meeting: quorum–presence requirement
A director must be present at the time that the vote is taken for quorum.
Presence includes video/phone call equipment only if ALL persons participating in the meeting to hear and speak to one another
Board meeting: requirement to hold meetings
Board may act without a meeting if unanimous written consent.
Board meeting: dissent is effective when
A director’s dissent is effective if
(1) entered dissent in the meeting minutes;
(2) filed written dissent before meeting is over; or
(3) mailed subsequent written dissent to secretary of the corp
Directors and officers’ fiduciary duties
Directors and officers owe a duty of care and loyalty to the corp
Director’s duty of care
Directors must act with care that a person in a like position would reasonably believe appropriate under similar circumstances. Special skills are expected to be used
Directors may rely on expertise of officers/employees, outside experts, or committees
Directors’ duty of care: Business Judgment Rule
Definition
Rule (4 elements)
Definition: A rebuttable presumption that D reasonably believed his actions were in the corp’s best interest.
Rule: In the absence of (a) fraud, (b) illegality or (c) self-dealing, courts will not disturb a (d) good faith business decision
Good faith decision: no BJR for uninformed, hastily made decisions
Director’s duty of loyalty
Definition
When is it violated
Directors, executives, and other insiders have duty to put corp.’s interests above own
Violated if director engages in (1) self-dealing unless safe harbor rules or
(2) usurp a corporate opportunity
Director’s duty of loyalty: self-dealing transaction
Definition – 3 types
(1) FINANCIAL MATERIAL INTEREST: transaction involving Interest involved that is financial AND material (material interest is if a reasonable D would be been influenced by the financial interest when voting on the matter)
(2) RELATIVE: transaction in which director/officer/relative receives a substantial benefit directly from the corp. or
(3) ASSOCIATION: transaction with another business that director is associated with
Director’s duty of loyalty: ratification
safe harbor for self-dealing
burden of proof shifts to P to prove it was unfair if (a) disclosed material facts and (b) ratified by majority of disinterested directors/shareholders.
Disinterestedness: Conflicts have to be (1) material (financial) + (2) One director’s conflict not necessarily conflict of entire board.
Director’s duty of loyalty: fairness doctrine
safe harbor for self-dealing
if transaction was substantively and procedurally fair to corp
Substantive fairness: whether corp received something of comparable value in exchange for what it gave to D
Procedural fairness: if directors followed proper procedure
Director’s duty of loyalty: corporate opportunity doctrine
Rule (3 factors determining corporate opportunity)
Exception
Directors and officers may not usurp a corp opportunity
Corporate opportunity exists if
(1) interest-or-expectancy or line-of-business test
(2) relationship btw offeror and D / corp and D, and
(3) how/when D obtained knowledge
© Ratification: director may take it if corp. declines the opportunity
Director’s duty of loyalty: corporate opportunity doctrine
Interest or expectancy test—
corporation have
(1) an existing interest (e.g. option to buy) or
(2) an expectancy arising from an existing right in the opportunity (e.g. purchase of property currently leased, corp actively seeking similar opportunity)
Director’s duty of loyalty: corporate opportunity doctrine
Line of business test—
is the opportunity within C’s current/prospective line of business (ask how expansive is C’s business).
Corporate indemnification of directors and officers
Definition
practice of corp paying for costs of director/officer’s defense in litigation
Corporate indemnification: mandatory
Corp must indemnify if D successfully defends
Corporate indemnification: prohibited indemnification
Corp cannot indemnify if D is liable for receiving an improper benefit
Corporate indemnification: permissive indemnification
Corp may indemnify if ∑2
(a) D acted in good faith with reasonable belief that it was in corp’s best interest and
(b) D had no reasonable cause to believe conduct was unlawful
Shareholders liability, generally
Generally, not personally liable for corp debt, unless court pierces veil
Piercing the veil: 4 factors in deciding whether to pierce veil
(1) alter ego (SH failed to observe corporate formalities);
(2) undercapitalization (failure to maintain funds sufficient to cover foreseeable liabilities;
(3) commingling assets/self-dealing and
(4) fraudulent dealings with creditor
Piercing more likely in
- tort situations (not K);
- in close corporations (not public)
Shareholder meeting requirements
Annual meeting–Every corp must hold an annual meeting to elect directors; Special meetings to vote on fundamental changes
Waive: SH can take action without meeting by unanimous written consent.
Failure to hold meetings doesn’t affect or invalidate corp business
Shareholder meeting: notice requirements
annual meeting notice
special meeting notice
insufficient notice consequence
SH must be given notice for both meetings. Special meeting must state the purpose.
Insufficient notice: SH can challenge any actions taken at the meeting © attendance
Shareholder’s proxy agreement is effective when ∑3
3 elements
duration
Proxy: effective if ∑3
(a) writing signed by SH as of record date;
(b) delivered to corp
(c) states that it authorizes 3rd party to vote SH’s shares.
Valid for 11 months
Shareholder’s voting eligibility
Only shareholders who own shares on the record date are eligible to vote.
Record date is fixed by the board, must be no more than 70 days before meeting
Shareholder’s voting validity
Vote effective when there is a quorum and votes cast in favor of proposal exceeds the votes cast against the proposal
Shareholder quorum requirement
Majority of the corp’s outstanding shares must be represented at the meeting.
outstanding shares: number sold and still remain in possession of shareholders
Cumulative voting:
only applies to election of directors.
may be permitted in the articles
Shareholder inspection rights
SH or agent may inspect if
(a) 5 days’ notice and
(b) states a proper purpose (relating to SH’s financial interest in the corp). within normal business hours
Shareholder right to bring direct suit
Direct suit if SH’s right is directly harmed.
(e.g. when SH is denied voting right, failed to declare a dividend, board failed to approve/deny a merger
Shareholder right to bring derivative suit
Yes if standing and injury (must primarily harm corporation)
Shareholder standing in derivative suit ∑3
must maintain
(a) contemporaneous stock ownership (at the time of bad act/omission and throughout litigation);
(b) fairly and adequately represent corp interest; and
(c) first demanded the board to address the problem unless futile
Shareholder standing in derivative suit: demand requirement
Requirement
Upon demand, how many days does board have to act
Before bringing a derivative suit, SH must make a demand to the board to address the problem unless futile. ©Demand not required under RMBCA
When demand is made, board has 90 days to act
Board’s dismissal of shareholder derivative suit valid if ∑3
Dismissal by board if
(a) majority of qualified directors
(b) decide in good faith,
(c) after reasonable inquiry that the action is not in corp’s best interest
Shareholder derivative suit–recovery of damages and attorneys fees
All recovery goes to corp.
P’s atty fee may be paid by corporation if litigation produces a substantial benefit to the corporation
Shareholders’ fiduciary duties
Generally no duty to fellow shareholders, except a controlling SH can have duties to minority SH
Controlling shareholder definition
someone with 50%+1 stock or might have a controlling vote (based on the nature of the ownership of the company
Controlling shareholder’s fiduciary duty arises when (3 situations)
Duty arises if controlling SH is
(1) selling interest to outsider,
(2) seeking to eliminate other SH from the corp, or
(3) receiving special distribution
Controlling shareholder’s fiduciary duty consists of
duty owed to minority SHs
(a) duty to disclose information that a RP would consider important in deciding how to vote on a transaction and
(b) duty of fair dealing when purchasing minority SH interest
Liability When a controlling SH sells stock to an outsider who was intent on looting or destroying the company, controlling SH may be liable for damages to other SH
priority upon liquidation of the corporation (creditors and stock ownership)
- Secured creditor →
- Creditor →
- Preferred →
- Common
Preferred stock: preference over common stock with respect to dividends and liquidation
Issuance of stock: authorization
Board or SH
Issuance of stock: adequacy of consideration
Any consideration that is deemed adequate by the board.
© Par value: if corp assigns minimum value for stock, it must sell for at least the minimum par value. If it doesn’t, Board is liable.
SH who bought below par value stock with knowledge of par value may also be liable to the creditors
Stock subscription agreement
agreement to buy before corp is formed. Irrevocable for 6 months
Shareholders’ preemptive rights
Unless granted in the articles, SH have no right to acquire newly issued stock to maintain the percentage of ownership.
© SH in close corp have these rights
Dividend authorization
exception
Board’s power to authorize dividend: SH have no right to dividends
© SH suit to compel: must prove funds are available and D refused to pay in bad faith
Dividends are unlawful when
Unlawful dividends when (1) corp is insolvent; or (2) issuing would make corp insolvent.
Directors are personally jointly and severally liable, for the amount in excess of the lawful amount. © good faith reliance on financial statements
Priority of dividend: preferred stock and participating preferred stock
Preferred stock gets paid first.
Participating preferred stock: get paid first, then get paid again by participating with the common shares (divide leftover by combined # of common and participating stock
Shareholders’ right to sell stock
Rule
Exceptions
SH can sell shares to anyone at any price
© close corp, 10b-5, 16B
Private restrictions on sale of stock by close corporations
close corp’s restrictions are enforceable if restriction is conspicuously noted and reasonable
© unenforceable against someone with no knowledge
Rule 10b-5 actions: prima facie ∑7
A private party can pursue 10b-5 action if
(a) P bought or sold securities;
(b) interstate commerce;
(c) D intentionally or recklessly engaged in fraudulent or deceptive conduct;
(d) conduct involves material information;
(e) P relied on D’s conduct;
(f) P suffered harm
- P bought securities (interstate), reliance and harm
- D act with intent/reckless, fraud, material info
Section 16(B) actions (insider trading)
Certain corporate insiders can be forced to return short-swing profits to corp.
Short-swing profits: profits made from buying and selling stock during 6 month period
Section 16(B): parties subject to rule
corp trading on national basis or
corp with assets with 10 mil+ and 500+ shareholders
Corporate insiders definition
Corporate insider: directors, officers, or SH with more than 10% stock of any class
Fundamental changes to corp: procedural requirement
Both SH and directors must approve fundamental change
Majority of the SHs casting vote must vote in favor
Corporate merger
2+ corp combines and one corp survives to assume assets and liabilities of the other
Corporate consolidation
2+ corp combines and a new entity is formed. New entity assumes assets and liabilities of both
Corporate involuntary dissolution by creditors
Creditors can compel dissolution only for insolvent C
Corporate involuntary dissolution by minority shareholders
3 situations
by majority vote or by minority:
There must be
(1) waste of corporate assets,
(2) deadlock–inability to obtain votes necessary for action, or
(3) oppressive majority control
Shareholders’ right of appraisal
Definition
Requirements to invoke ∑3
If SH objects to merger or acquisition, or if rights are materially adversely affected by amendment to C’s articles, SH can force C to buy their shares at a fair value.
SH must ∑3
(a) send written notice of dissent before the vote;
(b) SH must vote no or abstain from the vote; and
(c) after action is approved, make prompt written demand
Dissenter’s right of appraisal: “fair value”
Corp pays FMV determined by corp. if disagreement, court appoints expert appraiser to determine fair value
Close corporations generally
More relaxed governance.
Can form voting agreements
May have preemptive rights
S corp, limitation
limited in # of sharehodlers it can have
LLC
combines the limited liability of a corporation with the tax treatment of partnership
LLC creation
LLC membership requirements
must file article of organization. Operating agreement is like bylaw
No limitation on # of shareholders, no residency requirements
Members (Owners of LLC) can be individuals or corporations
Transferee of LLC membership interest–rights
Transferee of membership only gets right to share in profits/loss.
No right to participate in management
LLC management presumption
LLC can be member-managed or manager-managed. Unless otherwise specified, LLC is presumed to be managed by all of its members.
LLC members’ authority to bind LLC
Members of a member-managed LLC have broad authority to bind LLC
Members of a manager-managed LLC does not have the authority
LLC members’ liability:
Members not liable for LLC obligations unless piercing veil
LLC members’ fiduciary duties
Members have fiduciary duties to other members and to LLC
© Fiduciary waivers are recognized as long as not manifestly unreasonable
Corporate governance: voting agreements
Directors cannot have voting agreements. Shareholders
© close corp directors can have voting agreements
Corporate governance: corporate officers’ authority
Officers are agents of corporation. Can bind corp if they have the authority to bind.
