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July 2023 MEE > Corporations MEE > Flashcards

Corporations MEE Flashcards

1
Q

Shareholders

A

owners of the corporation

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2
Q

Board of Directors

A

group in charge of management of the corporation

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3
Q

Officers

A

agents of the corporation appointed to carry out the corporation’s policies

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4
Q

C Corporations

A

a corporation is taxed as an entity distinct from its owners - subject to double taxation

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5
Q

S Corporations

A

taxed like partnerships and yet retain the other advantages of the corporation form

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6
Q

Limited Liability Company (LLC)

A

limited liability of a corporation and the flow through of a partnership

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7
Q

B Corporations

A

benefit corporations - intends to benefit the public and the enviornment

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8
Q

Corporation Creation

A

are created by complying with state corporate law - majority of states is based on Revised Model Business Corp Act

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9
Q

De Jure Corporation

A

a corporation formed in accordance with the law

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10
Q

De Facto Corporation

A

corporate laws not followed - may result

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11
Q

Corporation by Estoppel

A

corporation may be recognized this way

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12
Q

De Jure Corporation Requirements

A

(A) Person
(B) Paper
(C) Act

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13
Q

Incorporators

A

person who undertakes to form a corporation

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14
Q

Articles of Incorporation Required Contents

A

(i) name of the corporation (corp., company, incorporated, limited)
(ii) name and address of each incorporator
(iii) registered agent and address
(iv) corporations stock

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15
Q

Articles of Incorporation Optional Contents

A

articles may include any other provision regarding operation of the corporation that’s not inconsistent with law

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16
Q

Articles of Incorporation Business Purposes

A

traditionally, corporations have included a statement of business purposes

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17
Q

Articles of Incorporation Absence Business Purposes

A

MBCA presumes that a corporation is formed to conduct any lawful business and is allowed to undertake any act that is necessary or convenient for carrying on their purpose

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18
Q

Ultra Vires Act

A

activities beyond the scope of the stated business purposes are said to be “ultra vires”

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19
Q

Common Law Ultra Vires Act

A

void and unenforceable

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20
Q

MBCA Ultra Vires Act

A

generally enforceable and can be raised in three situations

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21
Q

MBCA Ultra Vires Act Situations

A

(1) shareholder may sue the corporation to enjoin a proposed ultra vires act
(2) corporation may sue an officer or director for damages for approving ultra vires act
(3) state may bring an action to dissolve a corporation for committing an ultra vires act

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22
Q

Act

A

incorporators will have notarized articles delivered to the secretary of state and pay any required fees

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23
Q

If Directors Named in Articles

A

the board of directors hold the organizational meeting

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24
Q

If Directors Not Named in Articles

A

the incorporators hold the organizational meeting

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25
Q

Purpose of Organizational Meeting

A

(1) adopt initial bylaws
(2) appoint officers

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26
Q

Bylaws

A

internal document

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27
Q

Internal Affairs Doctrine

A

internal affairs of the corporation are governed by the law of the state of incorporation

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28
Q

Entity Status

A

upon formation, a corporation has entity status - the corporation can sue and be sued, hold property, be a partner, invest in other companies and commodities

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29
Q

Limited Liability

A

shareholders are liable only to pay for their stock, not for corporate debts

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30
Q

De Facto Corporation Requirements

A

(A) must be relevant incorporation statute
(B) parties made a good faith, colorable attempt to comply with the statute, meaning the parties tried and came close to forming a corp
(C) been some exercise of corporate privileges - meaning the parties were acting as though they were a corp

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31
Q

Promoters

A

person acting on behalf of a corporation not yet formed - procure commitments for capital and other instrumentalities that will be used by the corporation after its formation

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32
Q

Promoters Status

A

promoters are joint venturers who have a fiduciary relationship with one another

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33
Q

Promoter Selling Property to Corporation Disclosed to Independent Board

A

if the transaction is disclosed to an independent board of directors and approved, the promoter has met his duty and will not be liable for his profits

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34
Q

Promoter Selling Property to Corporation Non-Independent Board

A

if the board is not completely independent, the promoter still will not be liable for his profits if the subscriber or knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure

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35
Q

Promoter Fraud

A

promoters may always be liable if plaintiffs can show that they were damaged by the promoters fraudulent misrepresentations or fraud failure to disclose all material facts

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36
Q

Corporations Liability on Preincorporation Promoter Contracts

A

since the corporation does not exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name prior to incorp - may become liable only if it expressly or impliedly adopts the promoter’s contract

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37
Q

MBCA Promoter Liability

A

anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable - promoter is personally liable on the contract

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38
Q

MBCA Promoter Liability After Corporation Formed

A

promoter’s liability continues after the corporation is formed - even if the corporation adopts the contract and benefits from it

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39
Q

MBCA Promoter Liability After Novation

A

promoter is released from liability only if there is an express or implied novation

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40
Q

Promoter Expressly Relieved

A

if the agreement expressly relieves the promoter of liability, there is no contract; such an arangement may be construed as revocable offer to the proposed corp and the promoter has no rights or liabilities under the agreement

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41
Q

Foreign Corporation in State

A

must register with the secretary of state in each state in which it wishes to transact - may have to pay fees and register if acting in regular course of intrastate business activity

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42
Q

Debt Securities “Bonds”

A

when the corporation borrows money, it issues a debt security, usually called a bond

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43
Q

Bond

A

bond is a promise that the corporation will repay its loan with interest

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44
Q

Debenture

A

loan unsecured by corporate assets

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45
Q

Debt Securities Holder

A

creditor - but not an owner - of the coproration

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46
Q

Who Are Debt Obligations Payable To?

A

(a) the holder of the bond (bearer or coupon bond) or
(b) owner registered on the corporations records (registered bond)

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47
Q

Equity Securities

A

when the investor buys an ownership interest in the corporation, it issues equity securities, which is stock

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48
Q

Securities Equity Holder

A

owner, but not a creditor, of the coproration

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49
Q

Authorized Shares

A

shares described in the articles of incorporation

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50
Q

Issued and Outstanding Shares

A

shares that have been sold

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51
Q

Authorized Unissued Shares

A

shares that have been reacquired by the corporation through repurchase or redemption

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52
Q

Common Shares

A

corporation issues only one type of share, giving each shareholder an equal ownership right

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53
Q

Classes or Series Within a Class

A

ownership rights may be varied if the articles provide that the corporation’s stock is to be divided into classes or series

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54
Q

Share Options

A

right to purchase shares in the future under terms predetermined by the board - may be offered in exchange for any type of consideration - including future services

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55
Q

Issuance

A

an issuance of stock is when a corporation sells its own stock

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56
Q

Subscriptions

A

written offers to buy stock from a corporation

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57
Q

MBCA Preincorporation Subscription

A

preincorporation are irrevocable for six months unless otherwise provided in the terms of the subscription agreement or unless all subscribes consent to revocation

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58
Q

Payment for Pre-Incorporation Subscription

A

unless otherwise provided, payment is due upon demand of the board -

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59
Q

Subscriber Fails to Pay

A

may be penalized by sale of the shares or forfeiture of the subscription and any amounts paid on the subscription, at the corporation’s option

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60
Q

Post incorporation Subscriptions

A

revocable until accepted by the corporation - corporation and the subscriber are obligated under an agreement when the board accepts

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61
Q

MBCA Form of Consideration for Stock

A

stock (or option to buy stock) may be issued for any tangible or intangible property or benefit to the coproration

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62
Q

Par

A

minimum issuance price

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63
Q

No Par

A

no minimum issuance price - board can have the stock issued for any price it sets

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64
Q

Watered Stock

A

occurs when par value stock is issued for less than its par value

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65
Q

Who is responsible for watered stock?

A

directors or officers

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66
Q

Does MBCA use par value?

A

No - generally has eliminated the concept and allows corporations to issue shares for whatever consideration the directors deem appropriate

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67
Q

MBCA - Who Determines Value of Property or Services

A

if the corporation issues stock in exchange for property or past services, the board determines the value of the property or services

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68
Q

MBCA Conclusive Valuation

A

boards valuation is conclusive if made in good faith

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69
Q

MBCA Receives Consideration for Stock

A

considered fully paid and nonassessable as soon as the corporation receives the consideration for which the board authorized the issuance

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70
Q

Preemptive Right

A

right of an existing shareholder of common stock to maintain their percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money (cash or its equivalent)

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71
Q

MBCA Preemptive Rights

A

shareholders do not have the right to purchase newly issued shares to maintain their proportional ownership interest unless the articles provide the right - if silent no rights

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72
Q

Preemptive Limitations

A

even if the articles provide for preemptive rights, shareholders do not have preemptive right in shares issued:
(a) for consideration other than cash
(b) within six months after incorporation or
(c) without voting rights but having a distribution preference

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73
Q

Board of Directors Qualifications - Need to be Shareholders?

A

absent a provision otherwise in the articles or bylaws, the directors need not be shareholders

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74
Q

Board of Directors Qualifications in Articles or Bylaws

A

any qualifications for directors prescribed by the articles or bylaws must be reasonable and lawful; no qualifications may limit the ability of a director to discharge their duties

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75
Q

Board Elections

A

shareholders elect directors at each annual shareholders meeting, subject to contrary provisions in the articles

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76
Q

Staggered Boards

A

usually set in articles of incorporation - divided into half or thirds with one half or one third elected each year

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77
Q

Removal of Directors

A

Shareholders may remove directors with or without cause

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78
Q

Removal of Directors - Cumulative Voting

A

a director elected by cumulative voting cannot be removed if the votes case against removal would be sufficient to elect if cumulatively voted at an election

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79
Q

Removal of Directors - Voting Group

A

a director elected by a voting group of shares can be removed only by that class

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80
Q

Vacancy caused by Shareholder Removal

A

if the shareholders created a vacancy by removing a director, the shareholders generally must select the replacement

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81
Q

Vacancy caused by Resignation

A

board or the shareholders may fill the vacancy

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82
Q

Board Action

A

directors must act as a group - may act in the following ways:
(a) unanimous agreement in writing (email is okay) or
(b) at a meeting which must satisfy the quorum and voting requirements

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83
Q

Ratification of Defective Corporate Actions

A

directors, incorporators, and officers may ratify defective actions - the board must state the action to be ratified and the nature of the failure of the authorization, approve the ratification, and seek shareholder approval if necessary

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84
Q

Methods for Giving Notice of Meetings

A

the method is set in the bylaws

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85
Q

Notice for Regular Meetings

A

notice is not required

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86
Q

Notice for Special Meetings

A

at least two days written notice of date, time, and place is required - purpose is not

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87
Q

Failure to Give Notice

A

whatever happened at the meeting is voidable - maybe even void - unless the directors who were not notified waive notice

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88
Q

Directors Waiving Failure to Give Notice

A

(1) in writing any time or
(2) by attending the meeting without objecting at the outset of the meeting

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89
Q

Director’s Proxies

A

directors cannot give proxies or enter into voting agreements for how they will vote as directors

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90
Q

Board Quorum

A

majority - unless the bylaws say otherwise
(can be no fewer than one-third of the board members)

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91
Q

Broken Quorum and Effects

A

if people leave - once a quorum is no longer present, the board cannot take an act at the meeting

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92
Q

Director Action by Unanimous Written Consent

A

any action required to be taken by directors at a formal meeting may be taken by unanimous consent. in writing, without a meeting

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93
Q

Committees Actions

A

while the board can delegate actions to a committee, a committee cannot take the following actions:
(a) declare a distribution
(b) fill a vacancy
(c) recommend a fundamental change to shareholders

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94
Q

Board of Directors Duties Owed

A

(A) Duty of loyalty - discharge duties in good faith and with the reasonable belief that their actions are in the best interest of the corporation
(B) Duty of Care - use the care that a person in like position would reasonably believe appropriate under the circumstances

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95
Q

Burden in Challenging Directors Duty of Care

A

person challenging the directors actions on the basis of the breach of duty of care has the burden or proving that the statutory standard was not met

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96
Q

Two Situations in Which Director is Challenged for Breach of Duty of Care

A

(1) nonfeasance - director basically does nothing and
(2) misfeasance - board makes a decision that hurts the business

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97
Q

Misfeasance - Business Judgment Rule

A

directors who meet the standard will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous

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98
Q

Business Judgment Rule Burden

A

Plaintiff must show that the board either did not do their homework or did something glactically stupid

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99
Q

Information a Director May Rely Upon

A

in discharging duties, a director is entitled to rely on information, opinions, reports, or statements if prepared and presented by:
(1) corporate officers or employees whom the director reasonably believes to be reliable and competent
(2) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such persons professional competence
(3) a committee of the board in which the director is not a member if the director reasonably believes the committee merits confidence

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100
Q

Duty of Loyalty Burden

A

burden is on the defendant

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101
Q

Common Duty of Loyalty Scenarios

A

(a) conflicting transactions (self-dealing)
(b) competing ventures
(c) corporate opputrunity doctrine
(d) insider trading

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102
Q

Conflicting Transactions (self dealing)

A

any transaction between the corporation (on one side) and (1) one of its directors, (2) directors close relative, or (3) another business of the director’s (on the other side)

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103
Q

Conflicting Transaction Upheld

A

(1) it was approved by a majority
(2) it was approved by a majority of votes entitled to be case by disinterested shareholders
(3) judged by the circumstances at the time of the corporation entered into the transaction, it was fair to the corporation

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104
Q

Special Quorum Requirements

A

for purposes of the vote on a conflicting interest transaction, at a directors meeting, a quorum is a majority (at least two) of disinterested directors

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105
Q

Factors to be Considered in Determining Fairness

A

some court’s also require a showing of fairness (on conflicting interest transactions) - in determining whether a transaction is fair, courts look to factors such as adequacy of consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives

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106
Q

Remedies for Conflicting Interest Transactions

A

enjoining the transaction, setting the transaction aside, damages, and similar remedies

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107
Q

Directors May Set Their Own Compensation

A

unless the articles or by laws provide otherwise - the board can set compensation if reasonable and in good faith

108
Q

Competing Ventures

A

directors may engage in unrelated businesses, but engaging in a directly competing business raises serious duty of loyalty problems

109
Q

Corporate Opportunity Doctrine (usurpation of a corporate opportunity)

A

directors fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act

110
Q

When Does a Usurpation of a Corporate Opportunity Problem Arise?

A

only if a director takes advantage of a business opportunity in which the corporation would have an interest or expectancy - closer the opportunity is to the corporations line of business, the more likely a court will find it to be a corporate oppurtunity

111
Q

Usurpation Defenses

A

lack of financial ability to take advantage of the opportunity is not a defense

112
Q

Usurpation Remedies

A

corporation can sue to recover under a constructive trust theory

113
Q

Usurpation Remedies

A

corporation can sue to recover under a constructive trust theory

114
Q

Limiting or Eliminating Director’s Liability in Articles Permitted:

A

for money damages to the corporation or shareholders for actions taken or for failure to take action

115
Q

Limiting or Eliminating Director’s Liability in Articles Prohibited:

A

articles may not limit or eliminate liability for financial benefits recieved:
by the director to which she is not entitled, an intentionally inflicted harm on the corp or its shareholders, unlawful corporate distributions, or an inentional violation of criminal law

116
Q

Directors May Be Liable For:

A

(A) improper distribution
(B) improper loans
(c) ultra vires
(d) breaches of fiduciary duty

117
Q

When is a director presumed to concurr?

A

a director is presumed to concur with board action unless her dissent or abstention is noted in writing in the corporate records

118
Q

For Objection to Conflicting Interest Transaction Wiring Means:

A

(1) in the minutes
(2) delivered in writing to the presiding officer at the meeting or
(3) written dissent to the corporation immediately after a meeting

119
Q

Exception to Presumption of Concurrence

A

a director is not liable under the presumption if they were absent from the board meeting

120
Q

Power of Officer - Binding Corporation

A

whether officer can bind corporation is determined by whether they have agency authority to do so

121
Q

Power of Officer - Unauthorized Actions

A

may become binding on the corporation because of ratification, adoption, or estoppel

122
Q

Power of Officer - Scope of Corporation’s Liability for Officer

A

is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized

123
Q

Officer’s Duties

A

determined by the bylaws or to the extent consistent with the bylaws, by the board or an officer so authorized by the board - owe same duties of care and loyalty as directors

124
Q

Officer Resignation

A

an officer has the power to resign at any time by delivering notice to the corporation

125
Q

Officer Removal by Corporation

A

corporation has the power to remove an officer at any time, with or without cause

126
Q

Officer Resignation or Removal on Breach of Contract

A

the nonbreaching party may have a right to damages, but note that mere appointment to office itself does not create any contractual right to remain in office

127
Q

Indemnification

A

director or officer sued by or on behalf of the corporation - may seek (reimbursement) form the corp.

128
Q

Indemnification Category One

A

a corporation cannot indemnify a director who is (1) held liable to the corporation or (2) held to have received an improper benefit

129
Q

Indemnification Category Two

A

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 including, attorneys fees, incurred in connection with the proceeding - some states have to win entire cause others to extent won

130
Q

Indemnification Category Three

A

a corporation may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of the directors position if the director: (1) acted in good faith and (2) believed that their conduct was in the best interests of the corporation

131
Q

Who Makes the Indemnification Decision?

A

made by:
(a) disinterested majority of the board, or if there is not a disinterested quorum, by a majority of disinterested committee or by independent legal counsel - the shareholders may also make the determination

132
Q

Court-Ordered Indemnification

A

a court in which a director or officer was sued may order indemnification if it is justified in view of all the circumstances - if the director/officer was held liable to the corporation, reimbursement is limited to costs and attorneys fees

133
Q

Advances to Directors

A

a corporation may advance expenses as long as the director furnishes the corporation with a statement that the director believes he met the appropriate standard of conduct and that he will repay the advance of he is later found to have not met the appropriate standard of conduct

134
Q

Liability Insurance

A

a corporation may purchase liability insurance to indemnify directors or officers for actions against them even if the directors or officers would not have been entitled to indemnification under the 3 categories

135
Q

Shareholder Liability

A

generally limited to:
(1) liabilities for unpaid stock
(2) a pierced corporte veil
(3) absence of a de facto corporation

136
Q

Close Corporations

A

shareholders can run the corporation directly in a close corporation - few shareholders and stock is not publicly traded

137
Q

Shareholder Management Agreement

A

alternative management for a close corporation

138
Q

Shareholder Management Agreement - Not in Articles of Incorporation

A

shareholders exercise only indirect control of the corporation through their voting power, by which they elect and remove directors, adopt and modify bylaws, and approve fundamental changes in the corporate structure

139
Q

Two Ways to Set Up Shareholder Managment Agreement

A

(1) in the articles and approved by all shareholders OR
(2) unanimous written shareholder agreement

140
Q

Special Fiduciary Duty in Close Corporations

A

court’s impose a fiduciary duty on shareholders owed to other shareholders

141
Q

Close Corporations - Oppression

A

if there is oppression of minority shareholders, they can sue the controlling shareholders who oppress them for breach of this fiduciary duty

142
Q

Professional Corporations

A

licensed professionals, including lawyers, medical professionals, and CPAs may incorporate as professional corporations

143
Q

Employees of Professional Corporations

A

directors, officers, and shareholders must be licensed professionals

144
Q

Liability in Professional Corporations

A

personally liable for malpractice - shareholders generally not liable for corporate obligations or for other professional’s malpractice

145
Q

Shareholder’s Liability for Debts

A

shareholders generally cannot be held liable for corporate debts

146
Q

Piercing the Corporate Veil - Major Limitation

A

can happen in close corporations only

147
Q

Piercing the Corporate Veil Elements

A

(A) shareholders must have abused the privilege of incorporating and
(B) fairness must require holding them liable

148
Q

Three Common Piercing Veil Situations

A

(i) Alter Ego Theory
(ii) Undercapitalization
(iii) Fraud, Avoidance of existing obligations, or evasion of statutory provisions

149
Q

Piercing Situation One - Alter Ego Theory

A

if shareholders ignore corporate formalities such that the corporation may be considered the “alter ego” or mere instrumentality of the shareholders, and some basic injustice results

examples: shareholders treat corporate assets as their own, commingle their money with corporate money

150
Q

Piercing Situation Two - Undercapitalization

A

where the corporation is inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities

151
Q

Piercing Situation Three - Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions

A

necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations

152
Q

Piercing Limited to Existing Personal Obligation

A

mere fact that an individual choses to adopt the corporate form of business to avoid future personal liabillity is not itself a reason to pierce

153
Q

Piercing Corporate Veil - Who is Liable

A

normally, only shareholders who are active in the operation of the business will be personally liable - shareholder may even be another corporation

154
Q

Piercing Corporate Veil - Types of Liability

A

easily done in tort cases, but not in contract cases because the parties who contracted with the corporation had an opportunity to investigate its stability

155
Q

Piercing Corporate Veil - Corporation Insolvent

A

claims of share-holder creditors may be subordinated to outside creditors claims if equity so requires

156
Q

Who May Pierce the Corporate Veil

A

generally creditors may be allowed to pierce the corporate veil - court’s almost never pierce the veil at the request of a shareholder

157
Q

Shareholder as Plaintiff - Derivative Suit

A

a shareholder is suing to enforce the corporations claim, not their own personal claim

158
Q

Shareholder as Plaintiff - Direct Action

A

a direct action may be brought for a breach of fiduciary duty owed to the shareholder by an officer or director

159
Q

Distinguishing between Breach of Duty Owed to the Corporation and Duties Owed to Shareholder

A

Ask:
(1) who suffers the most immediate and direct damage, the corporation or the shareholder and
(2) to whom did the defendant’s duty run, the corporation or the shareholder?

160
Q

Derivative Suit - Recovery

A

the shareholder is asserting the corporation’s rights rather their own rights - so corporation recovers

161
Q

Derivative Suit - Expenses

A

(a) if the shareholder wins, may recover costs and attorneys fees
(b) if lose, cannot recover costs and attorneys fees

162
Q

Derivative Suit - No Reasonable Cause

A

if the court finds that the action was commenced or maintained without reasonable cause or for an improper purpose, it may order the plaintiff to pay reasonable expenses of defendant

163
Q

Derivative Suit Requirements

A

(a) standing
(b) adequate representation

164
Q

Derivative Suit Requirements

A

(a) standing
(b) adequate representation

165
Q

Derivative Suit Requirement One - Standing

A

shareholder must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law from someone who did own stock at the time the claim arose

(through inheritance or divorce decree example)

166
Q

Derivative Suit Requirement Two - Adequate Representation

A

shareholder must also fairly and adequately represent corporation’s interest

167
Q

Derivative Suit MBCA Requirements

A

the shareholder must make a written demand on the corporation (usually to board) to take suitable action

168
Q

Derivative Suit - State Requirements

A

some states, this demand must always be made, and the shareholder cannot sue until 90 days after making this demand, unless:
(1) the shareholder has earlier been notified that the corporation has rejected the demand; or (2) irreparable injury to the corporation would result by waiting the 90 days

169
Q

Derivative Suit - State Requirements in Some States

A

in other states, shareholders are not required to make this demand if th demand would be futile

170
Q

Derivative Suit - Corporation Joinder

A

corporation must be joined to the suit as a defendant

171
Q

Derivative Suit - Dismissal or Settlement

A

the parties can settle or dismiss a derivative claim only with court approval

172
Q

Derivative Suit - Dismissal if not in Corporation’s Best Interest

A

dismissal must be based upon an independent investigation that concluded that the suit is not in the corporation’s best interest

173
Q

Derivative Suit - Dismissal if not in Corporation’s Best Interest

A

dismissal must be based upon an independent investigation that concluded that the suit is not in the corporation’s best interest

174
Q

Derivative Suit - Investigation by Independent Directors or Panel for Dismissal

A

the investigation must be made by independent directors or a court appointed panel of one or more independent persons

175
Q

Derivative Suit - Court Determination on Dismissal

A

in ruling on the motion to dismiss, if the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation

176
Q

Derivative Suit Dismissal - Burden of Proof

A

in most cases, the shareholder bringing the suit has the burden of proving to the court that the decision was not made in good faith after reasonable inquiry

177
Q

Derivative Suit Dismissal - Burden of Proof Majority of Directors Personally Interested

A

if a majority of the directors had a personal interest in the controversy, the corporation will have the burden of showing that the decision was made in good faith after reasonable inquiry

178
Q

Authorized Stock

A

number of shares the corporation may issue

179
Q

Issued Stock

A

number of shares the corporation has sold

180
Q

Outstanding Stock

A

shares corporation has issued but is not reacquired

181
Q

Record Shareholder and Record Date

A

shareholder of record on the record date may vote at the meeting - the record date is fixed by the board but may not be more than 70 days before the meeting

182
Q

Exceptions to General Rule of Record Owner/Record Date

A

(1) Treasury Stock
(2) Voting by Proxy

183
Q

Treasury Stock

A

stock required by a corporation before the record date

184
Q

Exception One - Treasury Stock

A

no one votes on this stock - because it is outstanding at the record date

185
Q

Exception Two - Voting by Proxy

A

a shareholder may vote shares in person or by proxy executed in writing

186
Q

Proxy

A

is a (a) writing (fax and email executed in are fine), (b) signed by the record shareholder (email is fine if the sender can be identified), (c) directed to the secretary of the corporation, (d) authorizing another to vote the shares

187
Q

Revocation of Proxy

A

generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote themselves, in writing to the corporation secretary, or by subsequent appointment of another proxy

188
Q

Irrevocable Proxy

A

a proxy will be irrevocable only if it states that it is irrevocable and is coupled with an interest or given as security

189
Q

Irrevocable Proxy Requirements

A

this requires (1) the proxy says its irrevocable and (2) the proxy holder has some interest in the shares other than voting

190
Q

Statutory Proxy Control

A

rules governing proxy solicitation provide that:
(1) there must be full and fair disclosure of all material facts with regard to any management submitted proposal upon which the shareholders are to vote
(2) material misstatements, omissions, and fraud in connection with the solicitation of proxies are prohibited
(3) management must include certain shareholder proposals on the issues other than election of directors, and allow proponents to explain their position

191
Q

Voting Trust

A

a voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes in accordance with the provisions of the voting trust agreement

192
Q

Voting Trust Requirements

A

(a) a written trust agreement, controlling how the shares will be voted
(b) a copy of the agreement is given to the corporation
(c) legal title to the shares is transferred to the voting trustee and
(d) the original shareholders receive trust certificates and retain all shareholder rights except for voting

193
Q

Voting Agreements

A

shareholders can enter into a voting (or pooling) agreements providing for how they’ll vote their shares

194
Q

Voting Agreements Requirements

A

the agreement be in writing and signed

195
Q

Two Kinds of Shareholder Meetings

A

(a) annual meetings
(b) special meetings

196
Q

Annual Meetings

A

if the annual meeting is not held within the earlier of six months after the end of the corporations fiscal year or 15 months after its last annual meeting, shareholder can petition for court order to do so

197
Q

Special Meetings

A

special meetings may be called by (1) the board of directors, (2) the president, (3) the holders of at least 10 percent of the outstanding shares, or (4) anyone else authorized to do so in the articles or by laws

198
Q

Meetings Notice

A

Shareholders must be notified of meetings not fewer than 10 or more than 60 days

must be in writing

may be waived by writing or attendance

199
Q

Contents of Meeting Notice

A

notice must state date, time, and place and if special meetings, notice must also state the purpose of the meeting

200
Q

Consequences of Failure to Give Proper Meeting Notice

A

if proper notice is not given to all shareholders, whatever action was taken at the meeting is voidable (maybe void), unless those who were not sent notice waive the notice defect

201
Q

Waiver of Failure to Give Notice

A

(a) express waiver, meaning in writing and signed any time or
(b) implied waiver, meaning the shareholder(s) attend the meeting without objecting

202
Q

Shareholders Vote On

A

(i) to elect directors
(ii) to remove directors
(iii) on fundamental corporate changes

203
Q

Shareholder Quorum

A

general rule is that a quorum is a majority of outstanding shares entitled to vote, unless articles or bylaws require a greater number

204
Q

Shareholder Voting Quorum Present

A

each share is entitled to one vote - shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceeded the votes case against the matter, unless the articles or bylaws require greater proportion

205
Q

Specific Matters on Voting

A

electing a director - plurality

approve fundamental corporate change - majority of shares entitled to vote (other matters somtimes)

remove a director - majority entitled to vote (other matters sometimes)

other matters - majority of the shares that actually vote on the issue

206
Q

Cumulative Voting Optional

A

usually comes up in close corporations - available only when shareholders elect directors - if articles silent it does not exist

207
Q

Mechanics of Cumulative Voting

A

top two finishers are elected to the board

208
Q

Calculating Cumulative Voting

A

multiply the shareholders number of voting shares times the number of directors to be elected - total number may be divided as they decide

209
Q

Class Voting on Amendments

A

class has a right to vote on the action even if the class otherwise does not have voting rights

210
Q

Shareholder Resolutions

A

permitted to submit resolutions or proposals for action at shareholder meetings

211
Q

Shareholder Resolutions

A

permitted to submit resolutions or proposals for action at shareholder meetings

212
Q

Transferability of Stock

A

a shareholder can sell or give stock away

213
Q

Restrictions are Fine if Reasonable

A

restrictions are valid if they are not an undue restraint on alientation

214
Q

Right of First Refusal

A

requires to offer it first to the corporation - does not restrict the ability to transfer, but only requires the shareholder to offer the stock first to the corporation

215
Q

Restriction Enforced Against Transferee

A

yes - if (1) the restriction is conspicuously noted on the stock certificate (or is contained in the information statement required for uncertificated shares) or (2) the transferee had actual knowledge of the restriction at the time of the purchase

216
Q

Shareholders Inspection Rights

A

a shareholder has the right, personally or by an agent, to inspect (and copy) the books and records of the corporation

217
Q

Unqualified Right for Certain Records

A

(1) corporations articles and bylaws
(2) board resolutions regarding classification of shares
(3) mintues of shareholders meetings from past three years
(4) communications sent by the corporation to shareholders over past three years
(5) a list of the names and business addresses of the corporation’s current directors and officers, and
(6) copy of the corporation’s most recent annual report

written demand at least five days in advance

218
Q

Qualified Right for Certain Records

A

for more controversial things, such as (1) excerpts of the minutes of board meetings, (2) corporations books, papers, and accounting records, (3) shareholder records

must state proper purpose (reasonably related to the person’s interest as a shareholder) and demand must be five business days in advance

219
Q

Failure to Allow Proper Inspection

A

if the corporation fails to allow proper inspection, the shareholder can seek a court order

220
Q

Distibutions

A

are payments by the corporation to shareholders

221
Q

Types of Distributions

A

can take the form of dividends, redemptions of shares, repurchase of shares, distribution of assets upon liquidation

222
Q

Rights to Distributions Requirements

A

at least one class of stock must have a right to recieve the corporation’s net assets on dissolution

223
Q

Declaration of Distributions

A

the decision whether to declare distributions is generally within the directors discretion, subject to solvency limitations and any provisions to the contrary in shareholder’s agreement or articles

224
Q

Compelling Distributions

A

shareholders have no general right to compel - plaintiff must prove abuse of discretion

225
Q

Preferred Stock v Common Stock

A

preferred stock is to be paid before common stock

226
Q

Rights After Declaration

A

once a distribution is lawfully declared, the shareholders generally are treated a creditors of the corporation and their claim of distribution is equal in priority to claims of other unsecured creditors.

227
Q

Limitations After Declaration

A

a distribution can be enjoined or revoked if it was declared in violation of solvency limitations, the articles, or a superior preference

228
Q

Share Dividends (stock dividends - additional shares rather than cash)

A

distribution of a corporates own shares, to its shareholders are excluded from the definition of distribution

229
Q

Share Dividends Exception

A

shares of one class or series may not be issued as a share dividend in respect to shares of another class or series unless one of the following occurs:

(1) the articles so authorize
(2) a majority of the votes entitled to be cast by the class or series to be issued approves the issue or
(3) there are no outstanding shares of the class or series to be issued

230
Q

Modern View Situations in Which Distributions Cannot be Made

A

(1) the corporation would not be able to pay its debts as they become due in the usual course of business (insolvent) or
(2) the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights on dissolution of shareholders whose preferential rights are superior to those receiving the distributions

231
Q

Director Liability for Unlawful Distributions

A

directors are jointly and severally liable for improper distributions

232
Q

Director Liability for Unlawful Distributions

A

directors are jointly and severally liable for improper distributions - directors are directly liable to the corporation for the amount of the distribution that exceeds what could have been properly distributed

233
Q

Unlawful Distribution Defense for Directors

A

approved in good faith: (1) based on financial statements prepared according to reasonable accounting practices or on a fair valuation or other method that is reasonable under the circumstances or (2) relying on information from officers, employees, legal counsel, accountants, ect

234
Q

Unlawful Distribution Contribution

A

director is entitled to contribution from:
(1) every other director who could be held liable for the distribution and (2) each shareholder, for the amount they accepted while knowing that the distribution was improper

235
Q

Shareholder Liability for Unlawful Distribution

A

personally liable only if they knew that distribution was improper when they received it

236
Q

Fundamental Corporate Changes:

A

(a) amending the articles
(b) merging or consolidating into another company
(c) transferring substantially all assets
(d) converting to another form of business
(e) dissolving

237
Q

Fundamental Corporate Change Procedure

A

(1) board action adopting a resolution of fundamental changes, (2) the board submits the proposal to the shareholders with written notice and (3) shareholder approval

238
Q

Shareholder Approval with Fundamental Changes

A

a majority of the shares entitled to vote - an increasing number of states require only a majority of shares that actually vote on the proposed fundamental change

239
Q

Dissenting Shareholder’s Right of Appraisal

A

shareholders who did not vote in favor of the fundamental change have a right to force the corporation to buy their stock at fair value

240
Q

When Right of Appraisal is Triggered

A

(A) merging or consolidating
(B) transferring substantially all assets
(C) stock being acquired in a hare exchange
(d) converting to another form of business

241
Q

Market Out Exception

A

right of appraisal is only in close corporations

that is, if the company’s stock is listed on the national exchange or if the company has 2000 or more shareholders and the shares involved with a value of at least $20 million - no appraisal right

242
Q

Right of Appraisal Procedures

A

see page 70

243
Q

Right of Appraisal - Exclusive Remedy

A

shareholders only remedy if they do not like a fundamental change

244
Q

Merger

A

involves the blending of one or more corporations into another, and the latter corporation survives while the merging corporations cease to exist

245
Q

Consolidation

A

consolidation involves two corporations combining to form a new entity

246
Q

Approval by Shareholders of Surviving Company Not Required If:

A

(1) the 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 date of the merger will hold the same number of shares with identical preferences, limitations, and rights; and
(3) the voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corporation that were outstanding immediately prior to the merger

247
Q

Short Form Merger of Subsidiary

A

a parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary corporation into itself without the approval of the shareholders or directors of the subsidiary corporation - parent co must mail a copy of the plan of merger to each shareholder of the subsidairy

248
Q

Successor Liability

A

a creditor of a subsidiary/merger co may sue the survivor corporation

249
Q

Fundamental Corporate Change for Selling Corporation Only

A

both the transfer of all or substantially all assets and the share exchange are fundamental corporate changes for the selling corporation only

250
Q

Procedure for Transfer of all Or Substantially All Assets and Share Exchange

A

board action by both corporations is required, as well a notice to the selling company’s shareholders - approval by the selling company’s shareholders only (have appraisal rights)

251
Q

Successor Liability for Transfer of all or Substantially All Assets and Share Exchanges

A

if the buyer is a “mere continuation” of the seller, that is, it has the same management, shareholders, and so on - there is successor liability

also happens if court conclude that the deal was disguised as a defacto merger

252
Q

Conversion

A

conversion involves one business entity changing its form to another business form (ie corporation to an LLC)

253
Q

Conversion Requirements

A

board approval and notice to shareholders, shareholder approval, delivery to secretary of state

254
Q

Voluntary Dissolution - Dissolution by Incorporators or Initial Directors

A

if shares have not yet been issued or business has not yet been commenced, a majority of the incorporators or initial directors may dissolve the corporation by delivering the articles of dissolution to the state

all debts must be paid and if shares have been issued, any assets remaining after winding up must be distributed to the shareholders

255
Q

Voluntary Dissolution - Dissolution by Corporate Act

A

corporation may dissolve by corporation act approved under the fundamental change procedure - need board of director action, shareholder approval, and notice to the secretary of state

256
Q

Effect of Dissolution

A

a corporation that has been dissolved continues its corporate existence but is not allowed to carry on any business except as to wind up and liquidate its affairs

257
Q

Claims after Dissolution

A

p 75

258
Q

Revocation of Voluntary Dissolution

A

corporation may revoke a voluntary dissolution by using the same procedure that was used to approve the dissolution

259
Q

Involuntary Dissolution - Action by Attorney General

A

the attorney general may seek judicial dissolution of a corporation on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority

260
Q

Involuntary Dissolution - Action(s) by Shareholders

A

shareholder’s may petition for involuntary dissolution on any of the following grounds:
(i) director abuse, waste of assets, or misconduct
(ii) directors are deadlocked in the management of corporate affairs, the shareholders are unable to break this, and irreparable injury to the corporation is threatened, or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock
(iii) shareholders are deadlocked in voting power and have failed to elect one or more of the directors for a period that includes at least two consecutive annual meeting dates
(iv) corporation has abandoned its business and failed to dissolve within a reasonable time

261
Q

Election to Purchase in Lieu of Dissolution

A

as an alternative to ordering involuntary dissolution, a court might order a buy-out of the objecting shareholder

262
Q

Dissolution by Creditor

A

creditors may seek judicial dissolution if:
(1) the creditors claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corporation is insolvent; or
(2) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent

263
Q

Administrative Dissolution

A

state may bring an action to administratively dissolve a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state

60 days to correct

264
Q

Reinstatement following Administrative Dissolution

A

a corporation may apply for reinstatement within 2 years after the effective date of dissolution

265
Q

Reinstatement Application

A

must state the grounds for dissolution either did not exist or have been eliminated - relates back to the date of dissolution and the corporation may resume carrying on business as if the dissolution had never occurred

266
Q

Winding Up Steps

A

(A) give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its p.p.b.
(B) gather all assets
(C) convert assets to cash
(D) pay creditors
(E) distribute any remaining sums to shareholders, pro rata share, unless there is a liquidation preference

267
Q

Liquidation Preference

A

liquidation preference means “pay first”

July 2023 MEE (16 decks)

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