Corporations Flashcards
What three things are required to form a de facto corporation?
1) Relevant incorporation statute exists
2) Parties made good faith, colorable attempt to comply with it; and
3) Some exercise of corporate privileges (acting like a corporation)
Who is a promoter?
A promoter is a person acting on behalf of a corporation not yet formed. She might enter a contract on behalf of a corporation not yet formed.
When is the corporation liable on pre-incorporation contracts entered into by the promoter?
When it adopts the contracts. Adoption can be express – board takes action to adopt the contract – or implied – if the corporation accepts a benefit of the contract.
When is the promoter liable on pre-incorporation contracts?
Unless the contract clearly provides otherwise, the promoter is liable on pre-incorporation contracts until there is a novation (i.e. that the corporation replaces the promoter under the contract).
When is a pre-incorporation subscription revocable?
After 6 months, or unless it says otherwise or all subscribers agree to let you revoke.
What must the corporation receive when it issues stock?
Every state agrees that these are permitted: (1) money, (2) tangible or intangible property, and (3) services already performed for the corporation. The board determines the value of property or past services. The board’s valuation is conclusive if made in good faith.
In SOME states, (1) promissory notes, and (2) future services are acceptable as well.
What is treasury stock?
This is stock the company issued and then reacquired. It is considered authorized but unissued, and the corporation can then resell it. If it does, the board sets any issuance price it wants.
When is the board liable for watered stock?
If they knowingly authorized the issuance. The buyer is also liable (there is no defense – he is charged with notice of the par value). Watch out for scenarios where the buyer then transfers stock to a third party, who WILL NOT be liable if they didn’t know about the water.
If the articles are silent as to the existence of pre-emptive rights, do we have them?
Split of authority – “no” is gaining popularity. Remember, pre-emptive rights only apply when the corporation issues stock for MONEY (i.e. not property, services rendered.
When may shareholders remove directors?
At the annual meeting, or before their term expires by a vote of a majority of SHARES entitled to vote.
On what bases can shareholders remove a director?
Without of without cause.
If staggered board, then generally can remove only for cause.
What are the two ways a board of director can act?
By unanimous agreement in writing OR at a meeting (which has to satisfy the quorum requirements)
What notice is required for special director meetings and what are the consequences of defective notice?
Must state time and place of meeting. Failing to give required notice voids whatever happened at the meeting, unless directors not notified waive the notice defect. They can do this in writing any time or by attending the meeting without objecting.
Can directors give proxies or enter voting agreements for how they will vote as directors?
No. They are void.
Quorum for meetings of the board
Must have a majority of all directors to do business (unless a different percentage is set in by laws). If quorum is present, passing a resolution requires only a majority vote of those present.
Once a quorum is lost, can the board take an act at that meeting?
No. This is rule is different, however, for shareholder voting.
What is the role of the board of directors?
The board manages the corporation. So it sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc.
What can a committee delegated power by board of directors NOT do?
(1) Declare distributions, (2) Set director compensation, and (3) Fill a board vacancy. But it can recommend such things to full board for its action.
Duty of care standard for directors
A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business. Burden is on the plaintiff to show this. For nonfeasance cases, director only liable if breached the standard and his breach caused a loss to the corporation. For misfeasance cases, causation is clear.
What is the business judgment rule?
A court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis. Director is not a guarantor of success, but must uphold duty of care, do homework, deliberate, analyze, etc.
Duty of loyalty standard for directors
A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest. The burden is on the defendant in these cases.
Interested Director Transaction
This is any deal between the corporation and one of its directors (or a close relative of a director) or another business of the director’s.
When will an interested director transaction be set aside?
An interested director transaction will always be set aside or the director liable in damages, UNLESS director can show either (1) the deal was fair to the corporation when entered, OR (2) her interest and the relevant facts were disclosed or known and the deal was approved by either a majority of disinterested directors or a majority of disinterested shares.
Even if an interested director transaction was approved by either a majority of disinterested directors or disinterested shares, what do some courts require?
A showing of fairness.
In addition to the duty of loyalty standard, what happens if director seizes on a corporate opportunity?
In addition to acting in good faith and with a reasonable belief that what she does is in the corporation’s best interest, a director cannot usurp a corporate opportunity. That means the director cannot take it until she (1) tells the board about it and (2) waits for the board to reject the opportunity.
What is a corporate opportunity?
Something in the corporation’s business line. Also, (1) something the company has an interest or expectancy in, or (2) that was found on company time or with company resources.
Is the corporation’s financial inability to pay for the corporate opportunity a defense available to a director who usurped a corporate opportunity?
No. If director still has the opportunity, he must sell it to the corporation at his cost. if he has already sold it at profit, the corporation gets the profit in a constructive trust.
