Corporations and Limited Liability Companies Flashcards
Corporations - Formation - Articles of Incorporation
Corporation is formed by filing articles of incorporation with the state. Corporate existence begins when articles are filed unless articles state a later date.
Corporations - Formation - Requirements for Articles of Incorporation
Must state = corporate name, shares authorized, incorporator, registered agent.
May state = statement of corporations purpose.
Corporations - Pre-Organizing Transactions - Role of Promoter
Prior to formation, promoter engages in activities like procuring capital, entering into contract, etc. to bring the corporation into existence as a business entity.
Corporations - Pre-organization Transactions - Promoter’s Liability for Pre-Incorporation Agreements
Promoter’s liability = personal liability for knowingly acting on behalf of corporation before incorporation and jointly and severally liable for all liabilities created while so acting. Liability continues after corporation comes into existence, unless released by subsequent novation.
Exception = third party has actual knowledge that corporation has not formed and agrees to look only to corporation for performance.
Corporations - Pre-Organization Transactions - Promoter’s Fiduciary Duty
Promoter has fiduciary duty to pre-incorporated incorporation and can be liable for violations like, e.g. making a secret profit.
Corporations - Pre-Organization Transactions - Corporation’s Liability
Generally no liability for pre-organization transactions, unless the corporation later adopts the contract through accepting the benefits or through expressly accepting liability, e.g. through a board resolution.
Corporations - Formation - Ultra-Vires Actions
Traditionally ultra vires acts were void or voidable. However modern statutes only allow ultra vires acts to be challenged in limited situations:
i) shareholder suit to enjoin ultra vires action;
ii) corporation can take action against director, officer, or employee who engages in ultra-vires action; or
iii) state can initial proceedings against corporation to enjoin ultra vires action.
NB: an ultra vires act will be enjoined only if it is equitable to do so.
Corporations - Formation - Defective Incorporation
If lack of good faith effort to incorporate, person conducting business as corporation is personally liable for obligations incurred in the name of the nonexistent incorporation.
If there is good faith effort to incorporate and owner does not know requirements have not been met, person who deals with an entity as if it is a corporation may be estopped from denying its existence and seeking the personal liability of the business owner.
Corporations - Pre-Organization Transactions - Subscriptions for Shares
Prior to incorporation, persons may subscribe to purchase stock from the corporation when it comes into existence. Generally irrevocable for six months, unless all subscribers agree to a revocation. If a subscriber fails to pay, corporation can pursue collection, or sell the stock to someone else after written demand and giving the subscriber at least 20 days to comply.
Corporations - Liability - Investors’ Limited Liability
General principal of limited liability is subject to challenge primarily with respect to shareholders of a closely held corporation, and less frequently with respect to a parent corporation that holds a controlling interest in another corporation (i.e. parent-subsidiary relationship).
Corporations - Liability - Piercing the Corporate Veil - General Definition
Piercing the corporate veil = equitable response to situations that call for removing the shield that protects a shareholder from personal liability. Courts look at “totality of the circumstances.”
Corporations - Liability - Piercing the Corporate Veil - Factors Considered
Factors considered = undercapitalization of the corporation at time of formation, disregard for corporate formalities, intermingling of corporate and personal assets, use of corporate assets for personal purposes, self-dealing with the corporation, siphoning of corporate funds or stripping corporate assets, use of corporate form to avoid statutory requirements or legal obligations, wrongful/misleading/fraudulent dealings with a corporate creditor.
Corporations - Liability - Duty of Controlling Shareholder
Controlling shareholder = 50% + 1 ownership, or ownership of enough shares to maintain control, i.e. less than half but remaining shares are widely dispersed and not actively voted or resolutions require two-thirds supermajority and minority shareholder or block of shareholders have one third ownership.
Controlling shareholders fiduciary duty to minority shareholders = may arise in limited circumstances such as selling controlling interest to outsider, seeking to eliminate other shareholders from the corporation, receiving a distribution denied to the other shareholders.
Corporations - Financing - Sources
Sources = stock/shares and debt securities.
Corporations - Financing - Stock/Shares
General definition = stock/shares are securities that come with ownership and control interests. Every corporation required to have stock the represents the basic ownership interest of the corporation and stock that entitles the owner to vote on corporate governance matters.
Corporations - Financing - “Common Stock”
Common stock = basic ownership interest that entitles owner to vote on corporate governance matters.
Corporations - Financing - “Preferred Stock”
Preferred stock = has preference over other stock with regards to distributions.
Corporations - Financing - Issuing Stock
Need authorization by BD and/or shareholders. Corporations may also issue rights, options or warrants to buy its stock.
Corporations - Distributions - General
Distribution = transfer of cash or other property from a corporation to one or more of its shareholders. Most commonly a divided.
Corporations - Distributions - Limitations
Corporation cannot make distributions if it is insolvent or if the distribution would cause it to become insolvent.
Corporations - Distributions - Director’s Liability
Liability for distributions in violation of duty of care/loyalty = director is personally liable to corporation for amount in excess of lawful amount.
Corporations - Distributions - Shareholder’s Suit to Compel
Shareholder can sue to compel distribution. Requirements = show existence of funds legally available to pay a distribution and director’s bad faith for refusing to pay the distribution.
Corporations - Financing - Repurchase/Redemption
Corporation can buy back its own stock through repurchase or redemption (i.e. forced sale). Bought back stock constitutes authorized but unissued shares.
Corporations - Governance - Amending Articles of Incorporation
BD can amend if no stock has been issued; if stock has been issued, then BD adopts the amendment and submits to shareholders for majority approval.
