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Rocking the Bar Exam > Corporations (Essay Only) > Flashcards

Corporations (Essay Only) Flashcards

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1
Q

pre-incorporation transactions

what is a promoter?

A

they try to find investors who are wiling to invest in the corporation
enter into transactions on behalf of corporation even before it exists
fiduciaries to the corporation (can’t make secret profits)

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2
Q

pre-incorporation transactions

who is liable for pre-incorporation agreements (before corp is formed)?

A

corporation is not liable for pre-incorporation agreements
promoters are personally liable

EXCEPT Novation – shifts liability from promoter to corporation; agreement b/t promoter, corporation, and 3p

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3
Q

formation

what is required for articles of incorporation?

A
  • incorporators must sign and file, pay a fee
  • name of corporation with “Corporation,” “Company,” “Incorporated,” etc.
  • agent of corporation with name + address within state of incorporation
  • names and addresses of incorporators
  • duration
  • purpose
  • # authorized shares
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4
Q

formation

what is ultra vires?

A

acts beyond the powers of the corporation

acts are unenforceable if beyond its stated purpose in articles of incorporation

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5
Q

formation

when does limited liability begin?

A

moment of incorporation

Secretary of State accepts the fee + files the articles

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6
Q

formation

what is a de facto corporation / defective corporation?

A

corporation is not properly formed, but still enters into obligations as if it were
will still be treated as corporation with limited liability IF
1. organizers made a good faith effort to comply with the incorporation process AND
2. organizers had no actual knowledge of a defect in the corporate status

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7
Q

formation

what is a de jure corporation?

A

when all statutory requirements have been met

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8
Q

veil piercing

what is the general rule for piercing the veil?

A

SH are NOT personally liable for debts of a corporation, but only liable for amount invested into it
EXCEPT
court may pierce the veil of a limited liability to avoid fraud or unfairness

generally corporations receive limited liability

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9
Q

veil piercing

what factors does a court consider when deciding to pierce the veil?

A
  1. alter ego - investor/SH treated corporation just like itself
  2. undercapitalization
  3. fraud / fraud-like behavior
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10
Q

issuance of stock

what are the four types of shares as part of the sale of stock from the corporation to investors? how do you calculate each?

A
  1. authorized shares - in the charter
  2. issued shares - number of shares from authorized pool that BOD has actually sold
  3. outstanding shares = issued – treasury shares
  4. treasury shares - shares bought back
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11
Q

issuance of stock

which type of shares do you look at for determining who can vote?

A

only outstanding shares

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12
Q

issuance of stock

what consideration is needed? what is watered stock?

A

corporation can receive any valid consideration that BOD deems adequate (BOD’s discretion)

watered stock - corporation sets a par value amount and sells the stock for less than teh stated amount
SH who bought below the par value (so watered stock) are liable to the creditors of the corporation

if see par value, think about watered stock

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13
Q

issuance of stock

stock subscriptions

A

ask people to buy stock before corporation is formed
subscription agreements prior to incorporation are irrevocable for up to 6 months

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14
Q

issuance of stock

preemptive rights

A

right to acquire stock to maintain the percentage of ownership any time new shares are issued

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15
Q

distribution

how can you distribute money from a corporation?

A
  1. dividend
  2. buy back shares
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16
Q

distribution

what is the BOD’s role in dividends?

A
  • BOD has power to authorize dividends
  • SH have no right to dividends
  • BOD can NOT declare dividends if corporation is insolvent or would become insolvent upon issuing the dividend
  • BOD who authorize an unlawful dividend are personally liable, jointly and severally, to corporation for amount in excess of lawsuit amount
  • defense to ^: not liable if relied in good faith on financial statements
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17
Q

sale of securities

what is the general rule for selling securities?

A

SH can sell shares to anyone at any time for any purpose

EXCEPT
closely held corporations
federal restrictions

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18
Q

sale of securities / closely held corporations

what are the limitations for selling securities in a closely held corporation / private restrictions on sale of securities?

A
  • want to prevent outsiders from becoming involved in the corp
  • like 50-100 SH max
  • restriction must be conspicuously noted –> stock certificate must contain a full and conspicuous statement of the restriction OR statement that says there are restrictions which will be provided upon request
  • restricts are generally enforceable, but have to be knowledge of it
  • test is reasonableness

examples of restrictions

  • outright prohibition on transfers
  • require company’s consent
  • company has an option to buy
  • company has right of first refusal
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19
Q

sale of securities / federal causes of action

what is required for 10b-5 action from a private plaintiff?

A
  1. plaintiff purchased or sold the security
  2. transaction involves interstate commerce
  3. defendant engaged in fraudulent or deceptive conduct - making an untrue statement of a material fact (does not include opinions or predictions)
  4. conduct related to material info
  5. defendant acted with scienter - intentionally or recklessly
  6. plaintiff relied on D’s conduct
  7. P suffered harm
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20
Q

sale of securities / federal causes of action

what damages are available for private 10b-5 action?

A

no punitive damages

difference b/t stock’s value and price P received/paid

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21
Q

sale of securities / insider trading

what are the elements of insider trading (section 16(b))?

A
  1. applicable companies –> traded on national securities exchange OR assets over $10mm and over 500 SH
  2. corporate insiders - BOD, officers, SH with 10+%
  3. generally only transactions during or after becoming an insider (not before)
  4. during any 6 month period, corporate insider who buys and sells the stock is liable to corporation for any profits

reason of buying/selling and having non-public info is irrelevant

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22
Q

shareholder meetings

annual meetings

A
  • elect BOD
  • vote on major decisions
  • required to have an annual meeting
  • SH must get notice between 10 and 60 days, including time, date, location
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23
Q

shareholder meetings

special meetings

A
  • to vote upon fundamental changes
  • SH must get notice between 10 and 60 days, including time, date, location
  • notice must include the purpose of the meeting
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24
Q

shareholder meetings

what happens if notice is not sufficient (annual or special meeting)?

A

SH can challenge any actions taken at that meeting

BUT SH waive notice by actually attending the meeting

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25
Q

shareholder meetings

types of meetings + alternatives to meetings (list)

A
  • annual meeting
  • special meetings
  • unanimous written consent
  • proxy
26
Q

shareholder meetings

proxy - what is required to be legally effective?

A
  1. must be in writing
  2. signed by SH as of record date
  3. sent to secretary of corporation
  4. state that it authorizes someone else to vote SH’s shares AND
  5. cannot be valid for more than 11 month unless otherwise specified
27
Q

voting / SH

what do SH vote on?

A
  • election of BOD
  • mergers
  • share exchanges
  • amendments to charter
  • sales of all or substantially all of its assets
  • dissolution
28
Q

voting / SH

quorum requirements

A
  • quorum of corporation’s shares must be represented at meeting in person or via proxy
  • majority of outstanding shares represented at start of the meeting (1/2 + 1)

for a necessary vote
* if there’s quorum, SH vote is effective if votes case in favor exceed votes cast against
* don’t care about abstaining votes

29
Q

voting / SH

cumulative voting

A
  • only applies to electing directors
  • SH are given number of votes = # shares * number of director positions
  • can spread around your votes
30
Q

shareholder inspection rights

A

SH may inspect corporation’s records (incl. through an agent) as long as they state a proper purpose related to SH’s financial interest in corporation
have to be a SH, not a rando

31
Q

SH litigation

direct lawsuits

A
  • SH suing in their own name for damage s
  • damages go directly to the SH
  • if SH has been harmed directly, including interference in voting rights or dividends, misinformation, tort injury
32
Q

SH litigation

derivative lawsuits

A
  • SH is suing on behalf of the corp
  • alleged harm hurts the corporation
  • claim must be made in corporations name and recovery belongs to the corporation
  • standing: must maintain contemporaneous stock ownership at time of harm
  • must be SH at time of harm and hold shares throughout the litigation
  • must fairly and adequately represent the interests of corporation
  • plaintiff SH has to first demand BOD bring the lawsuit before SH can bring the suit (but demand futility defense in some states)
33
Q

SH duties

do SH have a duty to other SH?

A

no

34
Q

SH duties

duties of controlling SH

A

they may owe a fiduciary SH to minority SH during
1. sale of stock to an outsider / looter - like when controller sells stock to an outsider if the outsider was intent on looting or destroying the company
2. controlling SH transacts with the corporation - if they receive a special distribution o does a major business transaction for their own benefit, may owe duty of loyalty

controlling SH is 50% (obvi) or sometimes less

35
Q

BOD

removal and replacement process for BOD

A
  • SH may remove directors w/ or w/o cause EXCEPT staggered board
  • if staggered board, remove only for cause if the articles allow it
  • if vacancy or size has increased, new directors can be chosen by SH at special meeting or BOD
36
Q

board meetings

can directors vote by proxy?

A

nope

37
Q

board meetings

what quorum is required?

A

majority of total number of directors, unless bylaws specify a different number

round up

38
Q

board meetings

what vote is required?

A

affirmative vote

majority vote of those present at the meeting
round up

can also do unanimous written consent

39
Q

board meetings

how does a director dissent?

A
  • enter dissent in meeting minutes
  • file written dissent before meeting is adjourned
  • provide written dissent by certified mail to corp secretary immediately following adjournment

avoids potential liability for a board decision with which a director disagrees

40
Q

what duties do officers have?

A

duty of loyalty
duty of care

41
Q

Duty of Care

A
  • D/O owe this to corporation
  • Business Judgment Rule - in the absence of fraud, illegality, or self-dealing, courts will not disturb good faith business decisions
  • act with care that a person in a like position would reasonably believe appropriate under similar circumstances
  • use your special skills (accounting, law)
  • reliance defense - D/O is entitled to rely on expertise of officers, other employees, outside experts, committees
42
Q

Duty of Loyalty

A
  • may not receive an unfair benefit to the detriment of the corporation w/o effective disclosure and ratification
  • self-dealing transitions
  • corporation opportunity doctrine - usurping or stealing a corp oppy

ways to cleanse
1. disclosed and ratified by vote of majority of disinterested directors
2. “” disinterred SH
3. demonstrate that the transaction was fair (best defense)

43
Q

indemnification - defintion

A

practice of corporations paying for the costs of a director’s or officer’s defense in litigation, usually through D/O insurance

44
Q

indemnification - three types + when corporation pays/doesn’t pay

A
  1. required/mandatory indemnification - always required to pay costs of defense if D/O successfully defends the case (D/O wins)
  2. prohibited indemnification - cannot indemnify D/O who is liable for receiving an improper benefit or otherwise loses a lawsuit
  3. permissive indemnification - can indemnify D/O for costs of a suit if D/O acted in good faith with no intent to harm the corporation OR had no reasonable cause to believe hte conduct was illegal
45
Q

who has to approve fundamental changes? what are examples of fundamental changes?

A
  • both SH and BOD have to approve
  • BOD must adopt a resolution proposing the change
  • notice must be sent and majority SH have to vote for it
  • mergers
  • consolidations
  • dissolution
46
Q

what is the difference b/t merger and consolidation?

A

merger - one of the entities survives
consolidation - neither corporation survives, new entity is created

47
Q

dissolution (voluntary + involuntary)

A
  • voluntary dissolution by SH and BOD
  • involuntary dissolution by disgruntled parties (creditors or SH)

creditors have to show the corporation is not paying its debts
SH have to show corporate assets are being wasted, directors are acting fraudulently, OR directors and SH are deadlocked

48
Q

dissenters’ or appraisal rights

A

SH are entitled to these rights if they don’t want to participate in a merger, asset. sale, amendment to charter, etc.
entitled to have their shares purchased by corporation at a fair value determined by the court

to invoke:
1. SH must send written notice to corporation prior to vote of intent to dissent
2. at meeting, SH must abstain or vote no
3. SH must make prompt written demand for FMV after action has been approved

49
Q

close corporations / closely held corporation

A
  • SH are often D/O too
  • rarely publicly traded
  • relaxation of rigid rules for corporations
  • can form voting agreements (not allowed in regular corporations)
  • preemptive rights - default rule prohibiting these may be relaxed
50
Q

S Corp.

A
  • special tax treatment, but a corporation for state corporate law purposes
  • only taxed once (like a partnership)
  • NOT taxed at entity level –> pass-through taxation
  • limited number of SH allowed
51
Q

Limited Liability Company (LLC)

A
  • gets limited liability of corp + tax treatment of partnership
  • no limitations on number of SH, no residency requirements, no natural persons requirement (more flexible than S Corp)
  • files articles of organization and operating agreement with the state
  • owners are called members not SH
  • presumed to be managed by ALL of its members
  • follow general corporate law principles
52
Q

tip

if discussing whether director met duty of care

A

also discuss the business judgment rule

53
Q

director’s DOL in usurping a corporate opportunity instead of first offering it to corporation –> what test applies

Essay 5317

A

trying to determine whether the oppy is the type where it must first be offered to the corp

  1. interest or expectancy test
    whether the corporation has an existing interest or an expectancy arising from an existing right in the opportunity

expectancy can also exist when the corporation is actively seeking a similar opportunity

  1. line of business test
    whether the opportunity is within the corporation’s current or prospective line of business
    key is how expansively the corporation’s line of business is characterized
54
Q

what happens if there is a conflict of interest?

Essay 5317

A

BJR does NOT apply to COI

55
Q

piercing the corporate veil - mere instrumentality test

Essay 2828

A
  1. members dominated the entity in such a way that the LLC had no will of its own
  2. members used that domination to commit a fraud or wrong
  3. control and wrongful action proximately caused the injury
56
Q

piercing the corporate veil - unity of interest and ownership test

Essay 2828

A

petitioner must demonstrate that there was
such a unity of interest and ownership b/t entity and members that, in fact, the LLC did not have an existence independent of the members and
that failure to pierce the veil through to the members would be unjust or inequitable

57
Q

contracting out of duty of loyalty

Essay 2828

A

operating agreement can amend the duty of loyalty as long as it is not manifestly unreasonable

58
Q

conflict of interest - define it!

Essay 3567

A
  • self-dealing
  • any transaction b/t director and corp that would normally require approval of the board of directors AND that is of such financial significance to the director that it would reasonably be expected to influence the director’s vote on the transaction
  • can be direct or indirect
  • must be financial and material
59
Q

member-managed vs. manager-managed LLC

A
  • member-managed = direct management of the LLC by its members
  • manager-managed = centralized management of the LLC by one or more managers who need not be members
  • default is member-management
60
Q

rule statement queen!

whether SH have authority to amend bylaws for director nominations

Essay 3406

A

Shareholders have the power to amend a corporation’s bylaws under state law.

A corporation’s bylaws for the management of the corporation’s business or regulation of its affairs are enforceable, so long as the bylaws do not conflict with state law or the articles of incorporation.

The nomination of directors and the procedure for nominating directors are common provisions in the bylaws and are consistent with regular corporate practice.

61
Q

rule statement queen!

whether board-approved bylaws preempt subsequent conflicting bylaw amendments by SH on same subject

Essay 3406

A

Shareholders have the power to amend the bylaws.

The board of directors can also amend the bylaws unless the articles of incorporation or a vote by the shareholders limits this power.

Shareholder-approved bylaws can amend or repeal existing bylaw provisions, regardless of whether the bylaw was initially approved by the shareholders or the board of directors.

However, a shareholder-approved bylaw dealing with director nominations may not limit the board’s power to amend, add, or repeal to ensure an orderly process.

Thus, if shareholders approve a bylaw amendment that limits further board changes, the board could only amend or add to the bylaw to safeguard the voting process; it could not repeal the shareholder-approved bylaw.

62
Q

rule statement queen!

whether SH can bring suit challenging management’s refusal to include a bylaw amendment + amendment of bylaws is a direct or derivative suit

Essay 3406

A

A shareholder may bring a direct or a derivative action against the corporation in which the shareholder owns stock.

In a direct action, the shareholder is vindicating his own rights and is not required to make a demand on the board of directors before proceeding with the litigation.

By contrast, in a derivative action, a shareholder brings suit on behalf of the corporation and is typically based on a breach of fiduciary duties by the board of directors.

To bring a derivative action, the shareholder must have standing and must make a written demand upon the board of directors.

To have standing, the shareholder must have been a shareholder at the time of the wrong and at the time the action was filed, and continue to be a shareholder throughout the litigation.

The shareholder is required to make a written demand upon the board of directors unless the demand would be futile. Not all jurisdictions recognize the futility exception, however.

In states that do not recognize the futility exception, demand must be made upon the board in all cases.

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