Corporations Rule Statements Flashcards
Ultra Vires Acts
Acts outside the purpose stated in its certificate of formation. An ultra vires act is valid, but a shareholder may seek an injunction to prevent the corporation from performing the act.
Derivative Suit
A derivative suit is a suit brought by a shareholder on behalf of a corporation. To bring a derivative suit, a shareholder must have standing: 1) she must have owned shares when the challenged act occurred or acquired them by operation of law (i.e. through inheritance or divorce) from someone who did, 2) she must fairly and adequately represent the corporation’s interests, 3) and the shareholder must make a written demand on the corporation, and wait 90 days for a response, to bring the suit or take other suitable action (unless the corporation rejects the demand sooner or the delay would cause irreparable harm.
Formation of a Corporation
In Texas, to form a corporation, an incorporator must complete and submit a certificate of formation to the secretary of state, who will then issue an acknowledgment of the filing. The incorporator can be a natural person who is 18 years old, without regard to residence or domicile. Once the SoS issues the acknowledgment of filing, the business’s corporate existence begins.
Issuance of Stock
In Texas, the general rule, the initial directors named in the articles must hold an organization meeting to adopt bylaws, elect directors, and transact other business. However, directors can act without a meeting by unanimous written consent.The corporation may issue stock provided the certificate of formation authorizes such stock.
Authorization: Generally, the issuance of stock must be authorized by the board of directors.
Consideration: In Texas, shares may be issued by a corporation in exchange for any benefits (tangible or intangible) to the corporation.
Absence of Fraud
A share transfer restriction may be imposed by the articles, the bylaws, or a written shareholder agreement.
Right of First Refusal
To be enforceable, a restriction must be reasonable and conspicuously noted on the share certificate (if not conspicuous, still enforceable against a transferee with actual knowledge).
In Texas, shares in a closely held corporation may be subject to a right of first refusal as provided in a shareholders’ agreement. If a transferee has notice or knowledge that a transfer of shares is in violation of a share transfer restriction, the transfer is invalid to the extent it violates the restriction.
Whether shareholders must receive notice of, and approve, indemnification of a corporate director.
Non-director shareholders are not entitled to notice to a meeting of the Directors. However, directors are entitled to notice. A provision allowing a corporation to indemnify a director may be authorized by the directors, but directors are not required to indemnify a director if the director committed fraud in the transaction for which they are seeking indemnification.
Piercing the Corporate Veil (PCV)
Shareholders and Directors are shielded from personal liability for corporate obligations unless the court pierces the corporate veil. Under Texas law, a court will pierce the corporate veil in a contract case only if a corporate creditor demonstrates that a shareholder used the corporation to perpetrate an actual fraud on the creditor primarily for the shareholder’s direct personal benefit. Constructive fraud is not enough.
Shareholder’s meeting notice requirements
All shareholders of record on the record are entitled to notice of a shareholders’ meeting.
The board of directors may set the record date to be a date not more than 60 days before the meeting. If no valid record date is set, the record date is deemed to be the date that notice of the meeting is given.
For meetings at which a merger or consolidation will be considered, the notice must be given not less than 21 or more than 60 days before a meeting. For such meetings, the the notice must indicate that a merger would considered (i.e. set forth the fact).
Quorum for shareholders meeting
A majority of the shares entitled to be voted constitutes a quorum. Only shares that have been issued and are outstanding are entitled to be voted. Shares that bee be repurchased by the corporation (i.e. treasury shares) are not entitled to be voted.
A shareholder is deemed present for a meeting and his shares counted once he shows up to the meeting. However, a shareholder who appears exclusively to complain about improper notice will not be deemed present for the meeting if he does not participate in the meeting.
Pre-emptive rights
Preemptive rights allow shareholders, usually in a closely held corporation, to maintain their percentage of ownership in a corporation by having the first opportunity to buy the corporation’s stock whenever new stock is issued.
Shareholders of a corporation generally do not have preemptive rights except to the extent provided in its certificate of formation.
If pre-emptive rights are provided for, a shareholder may waived in writing. The TBOC does not speak to oral waivers. Look for whether shareholders rely on the waiver. If so, it may still be effective.
Appraisal Rights
A shareholder who objects to the terms of the merger, consolidation, or interest exchange, or to the sale of all or substantially all of the assets of the corporation may be able to force the corporation to buy his stock at a fair value as determined by an appraisal. TBOC § 10.354. It is considered unfair to force dissenters to remain in a “fundamentally” changed corporation.
to perfect one’s appraisal rights, a share holder must notify the corporation before the special shareholders’ meeting of his dissent from the merger, and demand that the corporation pay him the fair value of his shares (the notice must specify the number of shares owned and an estimate of the fair value). The share holder must vote against the merger at the shareholder’s meeting. Finally the shareholder must submit his shares to the corporation no more than 20 days after the date on which he made his initial demand.
Corporation’s Name
The name of a corporation must contain the word “corporation,” “incorporated,” or “company,” or an abbreviation of one of these words. The chosen name of the corporation may not be the same as or deceptively similar to the name of another registered business entity doing business in Texas, unless the other entity consents in writing to the use of the similar name. The name should not be misleading. The chosen name of a corporation may not have a name that contains any word or phrase that indicates or implies that the entity is engaged in a business that the entity is not authorized by law to pursue.
Duty of Care
The board of directors of a corporation owes a duty of care to the corporation. In exercising this duty, the board of directors is authorized to rely on expert opinion regarding the appropriateness of its activities in managing and running the corporation.
Selection of Directors (upon death of board member)
Directors are selected by the shareholders at the annual shareholders’ meeting if a quorum is present. However, when there is a vacancy on the board of directors, including a vacancy created by an increase in the number of directors, either the shareholders or the directors may fill the vacancy. When the vacancy leaves the board of directors without a quorum, the directors remaining may elect a replacement director by a majority vote.
