Corporations and LLCs COPY Flashcards
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CORPORATION FORMATION
Generally, a corporation is formed when the articles of incorporation are filed with the secretary of state (unless the articles specify a delayed effective date).
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AMENDING THE ARTICLES OF INCORPORATION
The articles of incorporation may be amended if there is a majority vote from the directors and shareholders. However, minor amendments may be made by the board of directors without shareholder approval.
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CORPORATE BYLAWS
Corporate bylaws are written rules of conduct that must be initially adopted by the incorporators or board of directors.
The bylaws may contain any provision for managing the business and regulating the affairs of the corporation to the extent that is consistent with the law and articles of incorporation.
If there is a conflict between the articles and bylaws, the articles of incorporation govern.
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AMENDING CORPORATE BYLAWS
Corporate bylaws may be amended or repealed by the corporation’s shareholders. The board of directors may also amend or repeal the bylaws unless the shareholders expressly specify otherwise.
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PROMOTER LIABILITY
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).
A promoter is 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, unless:
- There is a novation where the parties agree to release the promoter from liability in favor of holding the corporation solely liable; OR
- The promoter is able to obtain indemnity from the corporation.
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CORPORATE ADOPTION
A corporation is not bound by any 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 (e.g., accepting the benefits of a known pre-incorporation contract).
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PIERCING THE CORPORATE VEIL
Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation when:
- The shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego;
- The shareholder failed to follow corporate formalities;
- The corporation was undercapitalized; OR
- There is fraud or illegality present.
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COMMON STOCK
Common stock is a security that represents ownership in a corporation. 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 (i.e., in the event of liquidation, common stockholders have rights to company assets only after bond holders, preferred stockholders, and other debt holders that have been paid in full).
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PREFERRED STOCK
Preferred stock is a security that represents ownership in a corporation. Preferred stock does NOT always have voting rights. Shares of stock are preferred if their holders are:
- Entitled to receive payment of dividends before any payment of dividends to another class of stockholders [e.g., common stockholders]; OR
- Entitled, in the event of liquidation or dissolution, to receive any payments or distributions before another class of stockholders (e.g., common stockholders).
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AUTHORIZED SHARES
Authorized shares are the maximum number of shares that a corporation is legally permitted to issue under its articles of incorporation.
In order to increase the amount of authorized shares, the articles of incorporation must be amended with a majority vote from the directors and shareholders.
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OUTSTANDING SHARES
Outstanding shares are the total number of shares issued by the corporation and held by the shareholders.
Generally, each outstanding share is entitled to one vote [regardless of class], unless otherwise provided in the articles of incorporation.
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TREASURY STOCK
Treasury stock consists of shares that a company issued and subsequently reacquired.
Shares that the corporation reacquired are not considered outstanding and cannot be counted in a shareholder vote.
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STOCK OPTIONS
A corporation may issue options for the purchase of its shares on certain specified terms that are determined by the corporation’s board of directors (e.g., how the options are issued, the consideration required for issuance, etc.).
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SHARE RIGHTS WITHIN A CLASS OF STOCK
All shares within a class of stock must have identical rights and preferences unless the shares within a class are divided into separate series.
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PREEMPTIVE RIGHTS
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.
Unless otherwise set forth in the articles, preemptive rights do not exist for:
- Preferred shares that cannot be converted to common stock;
- Shares sold for a consideration other than cash; OR
- Shares issued by majority shareholder vote to directors, officers, or employees.
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DIVIDEND AND DISTRIBUTION RIGHTS
Unless otherwise set forth in the articles of incorporation, a shareholder does not have any right to receive distributions (whether in the form of dividends or otherwise) from the corporation.
Dividends and distributions are generally paid to shareholders at the full discretion of the board of directors.
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ISSUANCE OF CONSIDERATION FOR SHARES
The board of directors may authorize issuance of shares for consideration of any tangible or intangible property or benefit to the corporation (e.g., cash, promissory notes, services performed, contracts for services performed, etc.).
Absent fraud or bad faith, the judgment of the board of directors as to the consideration received for the shares issues is conclusive.
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ANNUAL AND SPECIAL MEETINGS
A corporation must hold an annual meeting of shareholders at a time that is stated or fixed in accordance with the bylaws.
Special meetings can generally be called by:
- Persons authorized under the articles of incorporation;
- A demand from shareholders that accounts for at least 10% of the votes entitled to be cast at the meeting; OR
- The board of directors for limited purposes (e.g., dissolution of the corporation).
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NOTICE OF SHAREHOLDER MEETINGS
Generally, shareholders who are entitled to vote must be provided with notice of all annual and special meetings. For special meetings, the notice must:
- State the purpose of the meeting; AND
- Be provided 10-60 days before the meeting commences (in most states).
SHAREHOLDER 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.
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NON-VOTING SHARES
The articles of incorporation may provide that holders of certain types of shares cannot vote unless specific conditions are satisfied.
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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.
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ELECTION OF DIRECTORS
Shareholders elect directors either directly (each share equals one vote) or cumulatively.
In 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.
Cumulative voting is usually a more favorable method to represent the interests of minority shareholders.
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VOTE BY PROXY
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.
A proxy is freely revocable by the shareholder unless the recipient of the proxy has an economic interest in the shares.
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CORPORATE INSPECTION OF BOOKS AND RECORDS
A shareholder possesses the right to inspect corporate books and records during regular business hours so long as the purpose for the inspection is proper. In order to be proper, the purpose for the inspection must be reasonably related to a person’s interest as a shareholder.
Generally, a shareholder must make a written demand to inspect corporate books and records and allow the corporation a reasonable amount of time to respond (usually 5 days).
Procedural Requirements. Generally, a shareholder must:
(1) Make a written demand to inspect corporate books and records and allow the corporation a reasonable amount of time to respond (usually 5 days); AND
(2) Conduct the inspection during regular business hours at the corporation’s principal office.
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AUTHORITY OF DIRECTORS
Subject to any limitation imposed by law or the articles of incorporation, the board of directors has full control over the affairs of the corporation.
A quorum must be present in order for the directors to take action or vote. Unless otherwise set forth in the articles of incorporation, a quorum exists when at least a majority of the directors are present. Directors are considered present so long as all of the directors participating can simultaneously hear each other.
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AUTHORITY OF OFFICERS
The board of directors generally delegates day-to- day management of the corporation’s business to officers elected by the board (CEO, CFO, president, 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.
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DIRECTOR AND OFFICER DUTY OF CARE
Directors and officers owe the corporation a fiduciary duty of care. This duty includes:
- The duty to take reasonable steps to monitor the corporation’s management;
- The duty to be satisfied that proposals are in the corporation’s best interests;
- The duty to disclose material information to the board; AND
- The duty to make reasonably informed decisions. (In making such decisions, directors and officers may rely on information from others whom they reasonably believe are reliable.)
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BUSINESS JUDGMENT RULE [BJR]
In suits alleging that a director or officer violated his duty of care owed to the corporation, courts will apply the business judgment rule. Under this rule, a court will not second guess the decisions of a director/officer so long as the decisions are made:
- In good faith;
- With the care an ordinarily prudent person in a like position would exercise under similar circumstances; AND
- In a manner the director/officer reasonably believes to be in the best interests of the corporation.
Liability. If a director or officer breaches the duty of care, he may be held personally liable for damages. A corporation’s articles of incorporation may reasonably limit the liability of directors and officers for bad judgment, but NOT for bad faith misconduct.
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CONFLICTING INTEREST TRANSACTIONS
Directors and officers have a duty to avoid implicating their personal conflicting interests in making business decisions for the corporation. A director/officer has a conflicting interest in a transaction when the director/officer or a family member either:
- Is a party to the transaction; OR
- Has a beneficial financial interest in the transaction of such significance to the director/officer that the interest would reasonably be expected to exert an influence on the director/officer’s judgment if called upon to vote on the transaction.
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SAFE HARBORS
A director/officer that enters into a conflicting interest transaction may be protected from liability if:
- Disinterested shareholders approve the conflicting interest transaction;
- The non-interested members of the board authorize the conflicting interest transaction; OR
- The transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation.
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CORPORATE OPPORTUNITY DOCTRINE
The corporate opportunity doctrine prohibits directors and officers from usurping business opportunities that rightfully belong to the corporation for their own benefit.
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MERGERS AND CONSOLIDATIONS
A merger occurs when one of two existing corporations is absorbed by the other corporation. A consolidation occurs when two existing corporations combine into one new corporation. A merger or consolidation both require:
- The recommendation of an absolute majority of the board of directors; AND
- The agreement of each corporation by an absolute majority of shareholders.
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SHORT-FORM MERGERS
In many states, if a parent corporation owns at least 90% of the stock of a subsidiary, the subsidiary may be merged into the parent without approval from the shareholders of either corporation.
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DISSENTERS’ RIGHTS
After a merger or consolidation takes place, dissenting shareholders opposed to the merger or consolidation may either:
- Challenge the action; OR
- Receive payment determined at the fair market value of their shares immediately before the merger/consolidation took effect.
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SHAREHOLDER APPROVAL FOR SUBSTANTIAL SALE OF CORPORATE ASSETS
Shareholder approval is required for the corporation 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, if the disposal of assets is in the corporation’s usual and regular course of business, shareholder approval is not required (unless otherwise set forth in the articles of incorporation).
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DERIVATIVE CLAIMS
A derivative claim is a lawsuit brought by a shareholder on behalf of the corporation. The shareholder is suing to enforce the corporation’s rights when the corporation has a valid cause of action, but has failed to pursue it. This often occurs when the defendant in the suit is someone close to the corporation (e.g., a director or officer.
If successful, the proceeds go to the corporation. However, if the award to the corporation benefits the defendants, the court may order that damages be paid directly to the shareholder who brought the action.
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DERIVATIVE CLAIMS DEMAND REQUIREMENT
Generally, a shareholder must make a written demand on the board before commencing a derivative action. After submitting the written demand, the shareholder must wait 90 days to file the derivative action, unless the board rejects the demand during the 90-day period.
However, under the common law, and in some jurisdictions today, the plaintiff shareholder does not have to make a demand on the board if it would be futile to do so (e.g., the board is interested in the transaction being challenged).
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DIRECT CLAIMS
A direct claim is a lawsuit 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 corporation.
If a direct claim is successful, the proceeds go to the shareholder.
