Corporations and LLC Flashcards
Corporation
A legal entity created by complying with the statute governing incorporation which has freely transferable shares, a continuous existence, limited liability, and centralized management of assets by directors and officers.
Incorporation
A corporation is created by filing the articles of incorporation with the Secretary of State
The articles of incorporation must include
- incorporator names and addresses
- name of corporation
- name and address of initial registered agent
- number of shares corp authorized to issue
- provisions applicable to the granting of preemptive rights
Ultra Vires
Board of directors are not permitted to undertake action that is beyond the corporations authority.
Piercing the corporate veil
A court may disregard a corporations seperate entitey an hold SH or affiliated corp. liable on corporate obligations.
Courts look to 3 factors when determining if they should .:
- alter ego
- inadequate capitalization
- failure to comply with corporate formalities
Promoter and Duties
causes the corporation to become formed, organizaed and financed, by managing initial finance, arranging meetings with investors, negotiating preparing negotiaiton agreements. etc
Duties:
duty of loyalty -to avoid self dealing concerning assets they sell to the corporation.
- duty to disclose fully all material facts concerncing an y assets they sell to the corproation and whether they are making a profit.
Corporation remedies
- avoid transaction
- hold promoters liable for secret profit.s
Promoter Liability on Preincorporation K
Promoters are personally liable for contracts entered into on behalf of the corp. not formed yet formed. Personal liability will continue even after the corporation is formed unless there is a valid novation or an agreement to release liability.
If the promoter signs the contract as “X, as agent for Corp,, a corp to be formed” it does not resolve the liability issue. Under agency law, such a signature would release an agent from liability on a K the agent entered into on behalf of the principal. But promoters cannot act as an agent of a nonexistent principa.
Corporation Liability on Preincorporation K
Corporation not liable on any preincorporation contracts its promoter entered into on its behalf unless it assumes liability
May assume:
- K made for the corporations benefit
- concerned a matter on which the corporation could legally contract AND
- full disclosure was made to and independent board.
Adoption can be express(resolution of the board with knowledge of the material facts) or implied (accepts or acknowledges the benefits of the contract in some manner.
Meeting
- Corp must hold SH meeting annualy for the election of the directors and to conduct business
- vote required for approval may be set in the articles or bylaws, but where there is a conflict, articles wins.
- if articles/bylaws are silent, quorum is a majority of the outstanding shares entitled to vote
- only shareholders of record on the record date may vote at SH meetings. record date no more than 70 days prior to meeting.
- may vote by proxy.
- Proxies are revocable unless they are irrevocable and are coupled with an interest. May be revoked by a susnequent isntrumetn or the SH showing up to the vote in person.
- outstanding shares may vote, not treasury shares.
- shareholder voting agreements = enforceable
Shareholders
- own corporation, do not usually manage
- shareholders hire and fire directors
Directors
- manage the business and affairs of corporation.
- may act by a majority vote at a meeting at which a quorum of directors are present.
- cannot vote by proxy or agreement
- notice is only required for special meetings, if bylaws provide for the date/time of regular meetings.
- may be removed with or without cause by the majority of shares entitled to vote
- defects in quorum, notice or voting may be cured by post meeting ratification
- a director who objects to a course taken must dissent by an affirmative act at the time of the meeting at which the vote on the action is taken
Meeting
- Corp must hold SH meeting annually for the election of the directors and to conduct business
- vote required for approval may be set in the articles or bylaws, but where there is a conflict, articles wins.
- if articles/bylaws are silent, quorum is a majority of the outstanding shares entitled to vote
- only shareholders of record on the record date may vote at SH meetings. record date no more than 70 days prior to meeting.
- may vote by proxy.
- Proxies are revocable unless they are irrevocable and are coupled with an interest. May be revoked by a susnequent isntrumetn or the SH showing up to the vote in person.
- outstanding shares may vote, not treasury shares.
- shareholder voting agreements = enforceable
Duty of Care
Directors, officers, and incorporators must perform their duties in good faith, with such care as would an ordinary prudent person in a like position and in a manner reasonably believed to be in the best interests if the corporation. Courts will not second -guess these decisions.
Under the business judgment rule, there is a rebuttable presumption that directors decisions are made informed and rationally made in good faith and in the best interest of the corp.
A director may rely on corporate officers the director reasonably believes to be reliable and competent, and (2) corporate outsiders such as legal counsel and accountants as to matters that the director reasonably believes to be within the outsiders professional competence.
Directors are also subject to the following liabilities under the Model Act
- Improper Declaration of a Dividend - votes or assents to declaring dividend contrary to statute and articles
- Distributions During Liquidation - votes or assents to distribution during liquidation without payment of all known, debts, obligations or liabilities.
- Improper Redemption and Repurchase of Shares or Purchasing Corp shares - votes or assents to purchase of corporations own shares contrary to staute
- Failure to give notice to Barred creditors
- A director is entitled to contribution from the other directors who voted and officers who participated in a matter and did not meet the good faith standard.
Duty of Loyalty
A director officer or employee breaches the duty of loyalty where the individual
- has business dealings with the corporation (ie contracts with corp to buy or sells goods or serv or financial interest in a transaction._
- takes advantage of the corporate opportunity (ie
or
- enters into competition with the corporation in bad faith.
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Duty of Care
Directors, officers, and incorporators must perform their duties in good faith, with such care as would an ordinary prudent person in a like position and in a manner reasonably believed to be in the best interests if the corporation. Courts will not second -guess these decisions.
Under the business judgment rule, there is a rebuttable presumption that directors decisions are made informed and rationally made in good faith and in the best interest of the corp.
A director may rely on information, opinions , reports, records and other financial data from corporate officers the director reasonably believes to be reliable and competent, and (2) corporate outsiders such as legal counsel and accountants as to matters that the director reasonably believes to be within the outsiders professional competence.
Directors are also subject to the following liabilities under the Model Act
- Improper Declaration of a Dividend - votes or assents to declaring dividend contrary to statute and articles
- Distributions During Liquidation - votes or assents to distribution during liquidation without payment of all known, debts, obligations or liabilities.
- Improper Redemption and Repurchase of Shares or Purchasing Corp shares - votes or assents to purchase of corporations own shares contrary to staute
- Failure to give notice to Barred creditors
- A director is entitled to contribution from the other directors who voted and officers who participated in a matter and did not meet the good faith standard.
Duty of Loyalty
A director officer or employee breaches the duty of loyalty where the individual
- has business dealings with the corporation (ie material financial interest, knowledge of the interest, on both sides of transactions)
- takes advantage of the corporate opportunity (ie
or
- enters into competition with the corporation in bad faith.
An LLC operating agreement may waive the duty of loyalty so long as it is not “manifestly unreasonable”.
