Corporations and LLCs Flashcards
Articles of Incorporation Required Provisions
(1) name of the corp; (2) maximum number of shares the corporation is authorized to issue; and (3) the names and addresses of: board of dirs, incorporators executing the articles of incorporation, and the initial registered agent
Amend Articles?
Majority vote from the board of directors and shareholders.
Corporate bylaws
provide for the ordinary business conduct of the corporation (meeting times and dates, elections of a board of officers, filing vacancies, notices, etc.)
Amendment to bylaws
May be amended or repealed by the corporation’s shareholders. The board may also amend or repeal UNLESS the shareholders expressly state otherwise
Bylaws and Articles conflict?
Articles prevail
Promoter
A promoter acts on behalf of a corporation that is yet to be formed (usually assists in the planning and formation of the new business).
Promoter liability
personally liable for any contracts entered into on behalf of the corporation so long as both parties to the transaction know that the corporation has not yet been formed.
promoter not liable?
(1) novation where the parties agree to release the promoter from liability in favor of holding the corporation solely liable; OR (2) the promoter is able to obtain indemnity from the corporation
Corporation liability before incorporation
NOT bound by pre-incorporation contracts that were entered into by promoters UNLESS the corporation adopts such contracts. An adoption can be express or implied from the actions of the corporation or its agents
Shareholder liability
Shareholders are generally not liable for the debts of the corporation. Yet, piercing the corporate veil
Piercing the corporate veil
Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of the corporation when: (1) shareholder dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego; (2) shareholder failed to follow corporate formalities; (3) corporation was undercapitalized; (4) there is fraud or illegality present
Common stock
holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders have the lowest priority in the ownership structure
Preferred stock
does not always have voting rights. Shares of stock are preferred if their holders are: (1) entitled to receive payment of dividends before any payment of dividends to another class of stockholders; OR (2) entitled, in the event of liquidation or dissolution, to receive any payments or distributions BEFORE another class of stockholders
Authorized shares
Maximum number of shares that a corporation is legally permitted to issue under its articles.
To increase this amount, articles must be amended with a majority vote from the directors and shareholders
Outstanding shares
Total number of shares issued by the corporation and held by the shareholders. Generally each outstanding share is entitled to one vote unless otherwise provided
Treasury stock
shares that a company issued and subsequently reacquired. can’t vote
Shares within the same class
All shares must have identical rights and preferences unless the shares within a class are divided into separate series
Preemptive right
A preemptive right is a right of a current shareholder to purchase additional shares in the corporation before outsiders are permitted to do so in order to maintain their percentage of ownership in the corporation.
In most states, a corp must “opt in” to create preemptive rights by expressly including such rights in the corp’s articles of incorporation. In other states, preemptive rights are presumed to exist unless the corporation “opts out” by expressly barring such rights in the corporation’s articles of incorporation
Preemptive rights do not exist for
(1) preferred shares that CANNOT be converted to common stock; (2) shares sold for a consideration other than cash; or (3) shares issued by majority shareholder vote to directors, officers, or employees
Distribution Rights
(1) a shareholder does NOT have any right to receive distributions from the corp. generally paid to shareholders at the full discretion of the board of directors.
BUT if they refuse to issue in bad faith, but not necessarily in bad judgment, the shareholders may be able to compel distribution
Annual meetings
Corp must hold an annual meeting of shareholders at a time that is stated or fixed in accordance with the bylaws
Special meetings
Can be called by: (1) persons authorized under the articles of incorporation; (2) a demand from shareholders that accounts for at least 10% of the votes entitled to be cast at the meeting OR (3) the board of directors for limited purposes
Notice of Meetings
Shareholders who are entitled to vote must be provided with notice of all annual and special meetings. The notice must: (1) state the purpose of the meeting; AND (2) be provided 10-60 days before the meeting commences (in most states)
Quorum
A quorum must be present in order for the shareholders to take action at a meeting. Unless otherwise set forth in the articles of incorporation, a quorum exists when at least a majority of the shares entitled to vote are present
Voting Rights
(1) non-voting shares: Articles may provide that holders of certain types of shares cannot vote unless specific conditions are satisfied. However, they must still receive notice.
(2) weight of vote: all shareholders’ votes are counted equally, regardless of class
(3) record date: a shareholder is only entitled to vote if she acquired voting shares before a designated record date. Generally, the record date may be designated in the bylaws no more than 70 days prior to the shareholder meeting
(4) cumulative voting: elect directors either directly (each share quals one vote) or cumulatively (more favorable method to represent interest of minority shareholders)
Cumulative voting
voters cast as many votes as there are seats, but voters are not limited to giving only one vote to a candidate. Instead, they can put multiple votes on one or more candidates
proxy voting
A vote by proxy allows a shareholder to vote without physically attending the shareholder’s meeting by authorizing another person to vote her shares on her behalf. A valid proxy must exist in the form of a verifiable electronic transmission or a signed written appointment form. Freely revocable unless the proxy recipient has an economic interest in the shares
Inspection and proper purpose
A shareholder possess the right to inspect corporate books and records so long as the purpose for the inspection is proper.
What is a proper purpose?
reasonably related to a person’s interest as a shareholder. but, may inspect the Articles and bylaws without providing a proper purpose
Procedural process to see books
shareholder must (1) make a written demand to inspect corporate books and records and allow the corporation a reasonable amount of time to respond AND (2) conduct the inspection during regular business hours at the corporation’s principal office
Authority of directors
Have full control over the affairs of the corporation
Director quorum
A quorum must be present in order for the directors to take action or vote. majority of the directors present; present as long as they can hear each other, can destroy by leaving. Each D is presumed to concur with BOD action unless dissent/abstention in writing.
Director informal action
Informal action by the board may be taken without a quorum present so long as the board has unanimously consented to the action in writing
Director meeting notice
Presumed that directors have notice of regular meetings. However, for special meetings, directors must be given two days notice, which includes information about the time, location, and date of the meeting. such notice is NOT required to provide the purpose of the special meeting
Officer authority
Board generally delegates day to day management to the officers (CEO, CFO, etc.). The board may remove officers at any time with or without cause. However, such removal may result in a breach of contract action if the board is violating an employment agreement
Duty of care
Directors and officers owe corp fiduciary duty of care. Includes: (1) duty to take reasonable steps to monitor the corporation’s management; (2) duty to be satisfied that proposals are in the corporation’s best interests; (3) duty to disclose material information to the board; AND (4) the duty to make reasonable informed decisions (in making such decisions, directors and officers may rely on information from others whom they reasonably believe are reliable)
Business judgment rule
A court will NOT second guess the decisions of a director/officer so long as the decisions are made: (1) in good faith; (2) with the care of an ordinarily prudent person in a like position would exercise under similar circumstances; AND (3) in a manner reasonably believed to be in the best interests of the corporation
Liability for breach of duty of care
If a director or officer breaches the duty of care, he may be held personally liable for damages. A corporation’s articles may reasonably limit the liability of directors and officers for bad judgment, but NOT for bad faith misconduct
Duty of Loyalty
Directors have a duty to avoid implicating their personal conflicting interests in making business decisions for the corp.
Conflicting interest transaction:
when the director/officer or a family member either: (1) is a party to the transaction; OR (2) has a beneficial financial interest in the transaction of such significant to him that the interest would reasonably be expected to exert an influence on his judgment id called upon to vote on the transaction
conflicting transaction safe harbor
Protected from liability if: (1) disinterested shareholders approve the conflicting interest transaction by majority; (2) the non-interest members of the board authorize the conflicting interest transaction by majority; OR (3) the transaction, judge according to the circumstances at the time of commitment, is established to have been fair to the corporation
Corporate opportunities
corporate opportunity doctrine prohibits directors from usurping business opportunities that rightfully belong to the corporation for their own benefit. Have to offer it to corp first
mergers and consolidations
Require (1) the recommendation of an absolute majority of the board of directors; AND (2) the agreement of each corporation by an absolute majority of shareholders
Dissenters’ Rights
After a merger or consolidation takes place, dissenting shareholders opposed to the merger or consolidation may either: (1) challenge the action; or (2) receive payment determined at the fair market value for their shares immediately before the merger/consolidation took effect.
**a dissenting shareholder who opts to receive fair market value for their share loses the right to challenge the action absent showing of fraud
Sales of substantially all corporate assets
Shareholder approval is required for the corp. to sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property if the disposal is NOT in the corporation’s usual and regular course of business. However, the disposal of assets is in the corporation’s usual and regular course of business, shareholder approval is NOT required
derivative litigation
shareholder bringing suit on behalf of corp; generally must make written demand and wait 90 days to file unless board rejects demand during 90 day period.
(dont always have to make demand if futile) (independent committee has to find if suit is in the best interest of the corp)
derivative damages
Proceeds go to the corporation, not the shareholder who brought the action.
direct claims
A direct lawsuit is brought by a shareholder to enforce his OWN rights. The shareholder must prove actual injury that is NOT solely the result of an injury suffered by the corp. If a direct claim is successful, the proceeds go to the shareholder.
LLC Certificate of Formation
(1) name and purpose (2) address and PPB (3) name and address of registered agent; (4) initial capital contributions and (5) names of managers and info relating to them
Operating agreement
governs (1) relations between the members and the LLC; (2) the rights and duties of managers; (3) the activities and affairs of the LLC and (4) the conditions, if any, for amending the operating agreement.
LLCs presumed to be member managed
De facto corp
Requirements for de facto corp: (1) a relevant incorporation statute; (2) parties made a good faith, colorable attempt to comply with the statute; (3) some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation
**Insulates against personal liability of the shareholders, but corporation subject to “quo warranto” proceeding by state
consideration for shares
Pretty much anything money, binding obligation to perform future services with an agreed value, intangible property, services already performed
Proxy voting
(1) writing (2) signed by record shareholder (3) directed to corp secretary (4) authorize another to vote their shares (5) valid for 11 months. Revocable unless proxy says irrevocable and SH passed some interest
11 SAWS
Pooled or block voting trust
Formal delegation of voting power to voting trustee enforceable for ten years. Req’s (1) written trust agreement, (2) filed with corp, (3) transfers shares to voting trustee; (4) SH gets trust certifications, (5) SH retains all rights but voting
SH action for involuntary dissolution
SH may ask court for liquidation if (1) directors are deadlocked and corp is threatened with irreparable injury (2) oppression, or (3) waste is occurring
Fundamental corporate changes
Merger, consolidation, dissolution. Fundamental Amendments to Articles; sale of substantially all corporate assets
Fundamental change steps
(1) BOD resolution, (2) notice of special meeting to shareholders (3) approval by majority of all shares entitled to vote and by a majority of any voting group adversely effected (4) file notice with State.
**No shareholder approval for short form merger
Appraisal rights
Dissenting SH can force corp to buy shares at fair value, only in close corps
Appraisal rights requirements
Before vote, file written notice of objection and intent to demand payment; vote objecting to change; prompt written demand to be bought out. Court appoints expert appraiser to value
Internal affairs doctrine
Internal affairs of a corporation are governed by the law of the state of incorporation
requirements for de facto corporation
(1) must be a relevant incorporation statute; (2) parties made a good faith, colorable attempt to comply with the statute; (3) there has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corp
corporation by estoppel
Persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.
Indemnification of directors, officers, and employees
No indemnification: A corporation cannot indemnify a director who: (1) is liable to the corporation or (2) held to have received an improper benefit
Mandatory indemnification: A corporation MUST indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses
Permissive indemnification: may indemnify for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of his position as the director if: (1) acted in good faith and (2) believed that conduct was in the best interest of the corp.
merger with no change to surviving corporation
Approval of a plan of merger by shareholders of the surviving corporation is not required if
(1) articles of incorporation of the surviving corporation will not differ from the articles before the merger
(2) each shareholder of the survivor whose shares were outstanding immediately prior to the effective sale of the merger will hold the same number of shares, with identical preferences, limitations, and rights, and
(3) voting power of the shares issue as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corp. that were outstanding prior to the merger
Involuntary dissolution action by AG
AG may seek dissolution of a corp on the ground that it fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authoirty
Involuntary dissolution action by SH
(1) director abuse, waste or assets, or misconduct; (2) deadlocked directors; (3) shareholders are deadlocked in voting power and have failed to elect more directors (4) corp has abandoned its business and failed to dissolve within a reasonable time
Involuntary dissolution action by creditors
creditors may seek dissolution if: (1) creditor’s claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corp is insolvent; or (2) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent
Winding up steps
(1) give written notice to known creditors and publish notice of dissolution in a newspaper on the county of its PPB; (2) gather all assets; (3) covert assets to cash; (4) pay creditors; and (5) distribute any remaining sums to shareholders, pro rata by share, unless there is a liquidation preference
Requirements for derivative suits
(1) Standing (stock ownership at time of wrong and SH must fairly and adequately represent the Co.’s interest); (2) Demand requirements; (3) Co. joined as defendant
Dismissal of derivative suit
(1) dismissal or settlement requires court approval; (2) dismissed if not found in Co.’s best interests; (3) investigation must be made by independent directors or a court-approved panel of one or more independent persons
court determination to dismiss derivative suit
If the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation, in most states, the court will dismiss
Duties of controlling shareholders to minority shareholders in close corporation
Cannot use their powers to benefit at the expense of the minority shareholders
Oppression of minority shareholders
If there is an oppression of minority shareholders, they can sue the controlling shareholders who oppress them for this breach of fiduciary duty.
Liability when acting without Articles
“When a corporation’s articles of incorporation have not been filed, persons purporting to act for the corporation are personally liable for corporate debts if they knew when the debt was incurred that there was no incorporation”
Standard sentence for fiduciary duties
A director must discharge duties in good faith and with the reasonable believe that her actions are in the best interest of the corporation. Must also use the care that a person in like position would reasonably believe appropriate under the circumstances
Fundamental Corporate Changes
(1) Amending articles; (2) merging or consolidating into another company; (3) transferring substantially all assets; (4) converting to another form of business; (5) dissolving
What is the right of appraisal?
Dissenting shareholder’s right to force the corporation to buy their stock for fair value
What triggers right of appraisal? What types of fundamental changes?
Merging or consolidating, transferring substantially all assets, stock being acquired in a share exchange; converting to another form of business
Does appraisal exist in large corporation?
No. Close corporation only. In a close corporation, there is no market to buy the stock, so you can force the company to buy your stock.
Is right of appraisal an exclusive remedy?
Yes. Absent fraud, the right of appraisal is a shareholders’ exclusive remedy if they do not like a fundamental change.
Dissociation of an LLC
If a member leaves, then it leads to a dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC
LLC Liability
Generally individual members are not liable for losses. They are liable if the court decides to pierce the LLC veil or if proper procedures for dissolution and winding up had not been followed (Creditors may enforce claims against each of the LLC members. However, a member’s total liability may not exceed the total value of assets distributed to the member in dissolution).
what does corp filing need
We need to S P A W N the Corporation with the Articles.
Share info (Maximum authorized)
Par value (minimum issue price. If shares drop below, company has to pay shareholders the gap).
Address info (name and address of agent and principal place of business)
Why the corporation is being formed (statement of purpose) - usually it says something like “to engage in any lawful activity”
Name of corporation, including its designation such as “Inc.”
Determining Director Liability
Director is presumed to concur with board action unless her dissent or abstention is noted in writing in corporate records. This means: (1) in the minutes, (2) delivered in writing to the presiding officer, or (3) written dissent to the corp immediately after the meeting. Oral dissent by itself is not effective.
