corporations rule statements Flashcards
ways to recognize a corporation
- de jure (meets all formalities)
- de facto- in tort AND contract lawsuits
- estoppel- CONTRACT lawsuits only
forming a valid corporation
Incorporator must file articles of incorp. With sos- must contain:
- name of the corporation (co., inc., corp., ltd.)
- number of shares corporation authorized to issue- if classes, number in each class
- name and address of incorporators
- name and address of registered agent
- statement of purpose (not required)- if silent assumed any lawful purpose
if purpose is SPECIFIC, exceeding the purpose is an ultra vires act. co bound against 3rd parties BUT -shareholders can enjoin it -co can sue responsible managers for damages -state can dissolve corp
when is the co liable for a contract made before it incorporated? Is the promoter liable?
Happens when a promoter of a corporation not yet formed enters into a k with third party
corporation liable ONLY once adoption of K
Promoter is liable unless:
the contract with the third party says otherwise or
there is a novation where the corporation replaced the corporation as a contract party, even if the corporation has adopted the k
distinguishing features of a corporation
*separate legal person- legal entity distinct from owners.
*LIMITED LIABILITY - shareholders, directors, officers not liable for obligations of the corp.; only lose investment. exception- PCV; (only pierce-able in close corp if fraud/abuse and fairness requires) *generally taxed separately from shareholders and shareholders are also taxed- double tax (C corp)
NOTE: S corp is taxed once but must have <100 SH
what law governs a corporation?
the law of the state where it is incorporated
bylaws v. articles
bylaws are not required and are the operating manual. Adopted by incorporators. They are not filed w/ SOS. Can be amended by shareholders or board.
Articles are required and must be filed.
if bylaws and articles conflict, articles control
foreign corporations doing business elsewhere
Foreign means incorporation in another country or state
Doing business is more than owning property in the other state or occasional transactions
must qualify and pay prescribed fees; obtain certificate of authority from SOS
If it does not qualify it cannot sue in the state, but can defend itself
consideration for stock
some tangible or intangible property or benefit to co.
common law: could not be less than par and value received had to be held in a specific account
now: board’s good faith valuation is conclusive BUT likely if co sets par price, can’t sell for less
subscription
Offer to purchase stock from the corporation
Irrevocable for 6 months if made pre incorporation unless otherwise stated
Revocable until corporation accepts if made post incorporation
pre-emptive right
right of a stockholder to maintain existing percentage by buying that percent of any new issuance *majority- articles must state; some states imply one if articles don’t say
piercing corporate veil exception to lim liab
Gen rule: SH not liable for co’s obligations BUT Courts may PCV and reach the BAD SH (in close corp) or Parent Company if:
a. abused privilege of incorporating AND
b. Fairness must require holding them liable **Court more milling to PCV for TORT victim (than K claimant who came willingly)
DIRECTORS: qualifications, number, role, what they have to do to bind the business
responsible for management of the business and affairs of the corporation. Must be a natural person but bylaws can add more qualifications.
statute only requires one, but usu. more per bylaws
To properly ACT a) unanimous written consent OR b) quorum at meeting + majority of directors present approve
Individually are not agents
Meeting can be done by conference call or zoom- directors must be able to hear each other at same time
quorum for board meeting
majority of the board of directors
Or whatever is specified in bylaws but no less than one third
can lose a quorum if people leave. has to be quorum at time of vote
shareholders’ rights
1) elect
2) remove directors with or w/o cause
3) inspect articles, bylaws, board resolutions regarding shares, minutes of shareholder meetings, communications to shareholders, list of names and business addresses of corporation’s current directors and officers, copy of most recent annual corporation report
4) inspect board meeting minutes, corporation’s books and accounting records, shareholder records IF THEY STATE A PURPOSE reasonably related to their interest as a shareholder
5) bring suit on behalf of co- called derivative lawsuit
shareholder meeting notice
must be NOTIFIED 10-60 days before ANY meeting of date, time & place;
SPECIAL meeting notice also must state purpose
method of shareholder voting at mtg
- vote in person
- proxy
normally: one share, one vote except in elections if the corporation allows cumulative voting
proxy requirements and length of time valid for
writing
signed by SH
directed to secretary of corp
authorizing another person to vote his shares
Need not be given before record date as long as shareholder was a record owner on record date
valid for 11 mos UNLESS stated otherwise
duties directors owe
-duty of care
BIG EXCEPTION to duty of care= BJR but only if directors ACT. BJR will protect the directors if they rely on other directors, officers, or advisors that the bd. reasonably believes to be reliable & competent
-duty of disclosure
-duty of loyalty
a) conflicting interest transaction
b) corporate opportunity
business judgment rule
presumption that directors when making decisions:
-are informed
-act in good faith
-have a rational basis for their decision
the challenger has the burden of proof
duty of loyalty- rule and who holds burden of proof
- dir. owes a duty of loyalty to corp: good faith and reasonable belief that act is in co’s best interest
Burden is on defendant to show no breach
conflicting interest transaction- definition and approval
definition: director or a related person
-is a party to the transaction
-has a beneficial financial interest in the transaction
-is a director general partner, agent, or employee upheld if
-all material facts disclosed, and approved by majority of disinterested directors or 2 directors, whichever is less
-all material facts disclosed, approved by majority of disinterested shares OR
-fair to the corporation.
corporate opportunity
may not divert a business opportunity without giving co opportunity to act. 1. Corp has interest/expectancy in opp. 2. Opp is w/in corp’s line of business *Dir found on Co time w/ Co resources remedy: constructive trust
if one director doesn’t explicitly take part in board action that is challenged are they liable?
They can be, presumed to concur unless noted in writing, either: -noted in the minutes -delivered to the presiding officer at the meeting or -delivered to the corp immediately after meeting
If totally absent from meeting will not be liable
Also an exception if employee or officer provided info the director reasonably relied on
shareholder derivative suit- definition and requirements
derivative= shareholder asserts the corporation’s rights
1) P must have standing
a) ownership at time of act or omission or received ownership by operation of law (in a divorce or inheritance) from someone who was an owner at the time of act or omission
b) fairly, adequately represent co’s interests
2) P must make written demand to the corporation to take suitable action, and in some states may not bring suit until 90 days after demand filed. exception: if demand is futile (majority of directors are interested)
The corporation keeps the judgment and shareholder gets attorney fees and costs if shareholder wins, if shareholder loses they personally have to pay opponents attorney fees and costs
Op of law means divorce or inheritance
how can a corporation get a derivative suit dismissed?
must get court approval by showing that the majority of the directors who have no personal interest in the controversy (or a court appointed panel of disinterested people) find in good faith after reasonable inquiry that the suit was not in the best interest of the co. like it would be too expensive in light of possible judgment or corp unlikely to win.
BOP of good faith on co if majority of directors interested
who can call a special shareholder meeting?
the board
the president
the holders of at least 10% of voting shares
anyone else authorized by bylaws
*note- if shareholders they must have authority to vote on the subj of the meeting
quorum and votes needed for a regular shareholder action
Meeting: -need quorum- majority of outstanding shares
quorum is not lost if people leave the meeting
-approved IF: votes cast in favor exceed votes against (i.e. majority of votes cast approve)
Norm: one share/one vote
shareholder votes needed to elect a director
the candidate with the most votes for a director seat wins
10b-5 direct liability
- tippee
- misappropriation
- insider trading
tipper liability
If an insider gives a tip of inside information to someone else who trades on the basis of the inside information, the tipper can be liable under 10b-5 if the below elements are met:
i. Tipper must be an insider
ii. Tipper must have an improper purpose
iii. Tipper must receive some personal gain (monetary or reputational)
does a surviving corporation need to get approval of its shareholders to merge with another co?
generally yes. will need approval if:
the new entity will have different AOI (any difference counts)
original shareholders hold fewer shares after the merger
shares of original shareholders are subject to new restrictions or don’t have the same rights or preferences
OR
voting power of newly issued shares of surviving corporation > 20%
obviously will also need board approval from both companies.
10b-5 rule statement (state this first for ALL 10b-5 plaintiffs)
unlawful for any person, directly or indirectly, to use any means or instrumentality of interstate commerce, the mail, or the national exchange to:
- employ any device, scheme, or artifice to defraud
- make any untrue statement of material fact or omit to state a material fact necessary to make the statement not misleading, OR
- to engage in any act, practice, or course of business that operates or would operate as a fraud on any person in connection with the purchase or sale of a security
people who are treated as insiders
-employees, directors, officers of the issuer b/c they owe a duty not to use inside information for personal benefit -anyone else who owes a duty of trust and confidence to the issuer (constructive) -anyone who owes a duty of trust and confidence to the source of information* (misappropriators) *history of sharing confidences; family relationship (spouse, child, parent, sibling); OR agreed to keep confidential
tippee liability
state 10b-5 rule first
a tippee can be liable under 10b-5 if he trades on inside information, the tipper breached a duty, and the tippee knew
officers- roles, who controls them
a) selected by directors, supervised by directors
b) roles and titles of officer are the ones specified in bylaws - don’t have to have Pres, treas, sec in most states but some states require a minimum of pres and sec
c) can have more than one role and title
d) may be removed by board with or without cause
officers’ duties to the co
- duty of care 2. duty of loyalty same rules as for director!!
removing a director & cumulative voting
Shareholders have right to remove
if firm uses cumulative voting: -director may not be removed if the number of votes opposing his removal would have been enough to elect him
permissible ways for shareholders to seek to exercise control
- voting agreement
- voting trust
- SH management agmts
- Stock Transfer Restriction- must be for a reasonable purpose
- Variation of shareholder voting - cumulative
voting trust
written agmt transferring legal ownership of shares to trustee, who votes shares. 10 yr validity. SH have ben. ownership
shareholder management agreement
must be:
- close corp: can’t have if shares on natl exchange
- formalities- need either
- unanimous election in articles, by laws approved by all shareholders
- written agmt signed by all shareholders and filed with the co
- things can agree on
- eliminate board -no piercing even if fail to observe and may elect S corps status
- establish who will be directors or officers or how to select them
- give shareholders authority to exercise corp powers and they will then owe the duty of care and loyalty to the corporation and often to other shareholders
- valid for 10 years
Should note on the back of the share certificates
voting agreement
agmt that is written, signed, provides for manner in which shares voted.
specifically enforceable in most states but some states don’t grant specific performance of a voting agreement
do shareholders have any right to a distribution?
No, the distributions are in the board’s discretion and the board won’t be able to declare one if corporation is insolvent even if they want to
short swing trading
people liable: directors, officers, 10% or more SH rule: any profit realized from the purchase and sale of securities within a 6 month period must be returned to the co strict liability- use of inside info irrelevant profit = purchase at lower price 6 mo before or after sale **look at highest and lowest price w/in 6 mo, and number of shares both purchased and sold
dissolution- definition and types
def: termination of corporate existence
voluntary: board action + approved by majority of shares entitled to vote or
involuntary by court order if
-board deadlocked and threat of irreparable injury -shareholders fail at 2 meetings to fill a vacancy
-director abuse, waste, misconduct
-corporation abandoned its business and did not dissolve within a reasonable time
-a creditor makes a claim because they have a judgment that is unsatisfied and the corporation is insolvent, or corporation admitted the claim is due and owing and it’s insolvent
fundamental corporate actions
- sale of all/substantially all assets
- merger or consolidation
- dissolution
- share exchange
- amendment to articles
*conversion to another type of entity
if a fundamental change is voted on by shareholders and not all agree, what are the dissenting shareholders rights?
they will have a right of appraisal (ability to be bought out for FMV) if the stock is not listed on a national exchange or has 2,000 shareholders or more and the change was:
- merger
- shareholders of selling co in transfer of all/ substantially all assets
- NOT for amendment to AOI
- shareholders in share exchange whose shares are being acquired
the only other option is to sue if there is fraud.
