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Business Associations > Corporations - Sheet1 > Flashcards

Corporations - Sheet1 Flashcards

1
Q

6 type of fact patterns

A
  1. Organization of a corporations 2. Issuance of stock
  2. Directors and officers
  3. Shareholders
  4. Fundamental corporate changes
  5. Federal securities
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2
Q

What does it take to form a corporation?

A

PPA People
- incorporator. Execute the articles and deliver to sec. of state.
- Can be a person or entity.
Paper - Art. of Incorporation
- K between shareholders and C.
- K between C and State.
Act

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3
Q

PEOPLE (PPA) Information in Articles of Incorp

A

a. NAMES and ADDRESSES 1) corporation, company, incorporated, or limited. Must have 1 of these 4.
2) Name and address of each incorporator.
3) Name and address of each initial director.
4) Name of registered agent and address of the registered office.
(Registered agent is the company’s legal representative, so can receive service of process for the corporation.)

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4
Q

PAPER (PPA) Duration and Purpose

A
  • If no statement on duration, we presume perpetual existence.
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5
Q

What if the articles of Vance Refrigeration, Inc. say the corporation will “manufacture refrigeration machinery” and the corporation then goes into gold mining?

A

Doing this is an ULTRA VIRES activity (it’s beyond the scope of the articles). At common law, any ULTRA VIRES contract could be voided as beyond the company’s capacity. How do we handle ultra vires today? (EXAM)

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6
Q

PAPER (PPA) Capital Structure. Must include in art of inc.?

A

Definitions:

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7
Q

ACT (PPA)

A
  1. Deliver notarized articles Sec. of State and pay fees. If “accepted” by Sec. of State office, then: “Conclusive PROOF” OF VALID FORMATION. At that point, have a De Jure Corporation.
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8
Q

Internal affairs of a corporation (e.g., roles and duties of directors, officers, and shareholders) are governed by?

A

the state law in which they are formed. True if they only do business in Iceland? YES.

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9
Q

Cs as entities and Tax

A

A corporation is a separate legal person. It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions, etc.

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10
Q

Can avoid double taxation by?

A

Forming an S corp.

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11
Q

Who is liable for what the corporation does?

A

Are the directors or officers liable for what the entity does? No

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12
Q

DEFACTO Cs. and Cs by Estoppel. BEC.

A

When would this come up?

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13
Q

Defacto C Requirements

A
  1. There is a relevant incorporation statute (there is!) but mention it.
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14
Q

If Defacto C doctrine applies:

A

….the business is treated as a corporation for all purposes EXCEPT in an action by the state. (Such an action would be quo warranto).

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15
Q

Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders liable on the contract?

A

YES. Unless the court applies Defacto Corporation.

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16
Q

Corporation by Estoppel.

A

one who treats a business as a corporation may be estopped from denying that it is a corporation.

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17
Q

You do business with people who hold their business out as a corporation. They think it’s a corporation. So do you. You write checks to the “corporation” and deal with it as a corporation. But there is no corporation. You sue the proprietors individually.

A

Under C by Estoppel doctrine, you cannot win. You are estopped to deny that the business was a corporation.

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18
Q

Corporation by estoppel applies only in what kinds of cases?

A

Contract NOT Tort.

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19
Q

Status of Defacto and Estoppel

A

Abolished in many states (MENTION THAT ON EXAM).

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20
Q

BYLAWS: Adopt, Amend, Conflict

A

NOT RQ TO HAVE THEM

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21
Q

BEC. Pre-Incorporation Ks.

A

Promoter (person acting on behalf of a corporation NOT YET FORMED) enters into K before C is formed.

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22
Q

Pre-Incorporation K’s: When is PROMOTER liable?

A

The promoter is LIABLE on pre-incorporation K’s until there is a NOVATION:

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23
Q

Is the promoter liable?

A
  • Yes, if it adopted it. Adoption can be:
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24
Q

FOREIGN CORPORATIONS

A

Foreign is one incorporated ‘outside this state’

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25
Q

-What happens if a foreign C transacts Biz without qualifying?

A

-Foreign corps qualifies by getting a certificate of auth from the secretary of state. It gives info from its articles and proves good standing in its home state. MUST have a registered agent in this state and pay fees too.

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26
Q

What is an issuance of stock?

A

C sells its own stock.

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27
Q

Family Guy sells 3,000 shares of XYZ Corp. stock. Do the “issuance” rules here in Fact Pattern 2 apply?

A

No. because it is family guy selling the shares of XYZ Corp and not XYZ Corp. Just applies to an issuance by corp.

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28
Q

On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation not yet formed. A week later, S changes his mind. Can S revoke?

A

SUBSCRIPTIONS are written offers to buy stock from corporation.

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29
Q

Post- incorporation subscriptions revocable?

A

Yes, until acceptance.

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30
Q

At what point are the corporation and the subscriber obligated under a subscription agreement?

A

when the BOD accepts the offer.

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31
Q

Consideration - Form

A

ALWAYS PERMITTED:

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32
Q

Consideration - Amount

A

Par value: means minimum issuance price.

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33
Q

Could it get more?

A

$30,000,

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34
Q

No par means?

A

no minimum issuance price.

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35
Q

Treasury Stock

A

stock the company issued and then reacquired.

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36
Q

-Say the corporation issues stock in exchange for property or past services. Who determines the value of the property or services?

A

The BOD.

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37
Q

PRE-EMPTIVE RIGHTS

A

Right of an existing S to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY

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38
Q

S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has pre-emptive rights, then S has?

A

the RIGHT to buy 600 shares.

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39
Q

If the articles are silent, do we have preemptive rights?

A

NO.

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40
Q

BEC. Suppose the C Corp. articles provide for pre-emptive rights. You own 20 percent of the stock of C Corp. C Corp. issues stock to Peggy Olson to purchase property from Peggy. Do you have pre-emptive rights?

A

No. NOT AN ISSUANCE FOR MONEY. Must have been issued for money NOT property or any other thing.

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41
Q

*MOST TESTED

A
  1. Have to be adult natural person
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42
Q

BOD can only take an act in 2 ways.

A

1) Unanimous agreement in writing.

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43
Q

Does a conference call count?

A

void unless ratified later by a valid act.

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44
Q

-Note?

A

-Regular meetings: Notice is NOT required.

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45
Q

Can Directors give proxies?

A

NO, these are void as against public policy.

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46
Q

Quorum for Meetings of the Board (3)

A
  1. Must have a majority of ALL directors to do business (unless a diff percentage is set in bylaws).
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47
Q

9 directors. Need at least____to have a qurorum. To have a majority vote you need

A

5,

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48
Q

Role of Directors

A

-Manage the business. Day to day.

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49
Q

Director DUTY OF CARE

A

Burden is on the plaintiff.

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50
Q

Director DUTY OF CARE. 2 ways to breach

A
  1. Nonfeasance. (doing nothing): on EXAM, State definition of duty of care, then APPLY IT. A prudent person would attend meeting and do work. He is liable only if his breach caused a loss to the C (MUST PROVE CAUSATION). Hard to prove causation.
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51
Q

BJR Business Judgement Rule. (4)

A

A court will NOT second-guess a business decision IF at time made decision:

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52
Q

Exculpation Rule in Nevada

A

-Automatically get exculpation right unless articles take them away

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53
Q

Duty of Loyalty ** 2 Magic Sentences**

A

burden on the Defendant. 2 magic sentences:

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54
Q

BJR doesn’t apply to?

A

BJR doesn’t apply to Duty of Loyalty because no conflicts of interest is a prerequisite to BJR.

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55
Q

Interested Director Transaction Rule?

A

*STATE THE DUTY OF LOYALTY STANDARD–> THEN…

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56
Q

Directors can set their own compensation as directors or officers, but it must be?

A

Reasonable and in good faith. If excessive, it is a waste of corporate assets and breach of the duty of loyalty.

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57
Q

-Remedy?

A

RULE: A director cannot compete with her corporation, a director is a fiduciary.

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58
Q

What is a Corporate Opportunity?

A

Something the Corp has an interest or expectancy in, OR the D found out about it on company time or resources. In the C’s business line.

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59
Q

-Director cannot usurp a corporate opportunity. The director can’t take it until he?

A
  1. tells the BD about it AND
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60
Q

-Remedy?

A

REMEDY: director must sell it to the corporation at his cost if still has it OR if director sold at a profit, the corp gets the profit (constructive trust).

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61
Q

Other State Law Bases of Director Liability

A
  1. ULTRA VIRES ACTS–responsible officers and directors are liable for ultra vires losses.
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62
Q

A director is PRESUMED to concur with board action unless her dissent or abstention is?

A

-Noted in writing in corporate records.

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63
Q

A director is PRESUMED to concur with board action but there are **2. Exceptions.

A
  1. An absent director is not liable for stuff done at the meeting she missed.
64
Q

OFFICERS are _________? Who owe???

A

Officers are agents–owe the same duties of care and loyalty as directors. BEcause agents, can bind the corporation for acts which they have authority (WATCH FOR AGENCY CROSS OVER Q on EXAM).

65
Q

Traditionally, must have what officers?

A

president, secretary, and treasurer. Can have others.

66
Q

Officers are selected and removed by the

A

BOARD (BD); which also sets officers compensation.

67
Q

Generally, then, shareholders do NOT?

A

Generally, then, shareholders do NOT hire and fire officers.

68
Q

-No indemification allowed IF?

A

D is held liable to the C or held to have received an improper personal benefit. Can NOT indemnify.

69
Q

-C MUST indemnify (mandatory) IF?

A

If D is successful in defending, on the merits or otherwise. (note if case thrown out bc of SOL, this is “otherwise”).

70
Q

-C MAY indemnify (permissive) IF?

A

-Anything not in the above 2 categories. If the case is settled.

71
Q

-Who Determines Indemnification Eligibility?

A

Disinterested directors, disinterested shares, or independent legal counsel determines eligibility.

72
Q

Articles can eliminate director liability to the corporation for…?

A

Throw these in every time.

73
Q

SHAREHOLDERS. Do they manage the C?

A

No, the BOD manages the corporation. HOWEVER, in certain ** CLOSE ** Corporations they can.

74
Q

A Close Corporation is a Corp with?

A
  1. Small number of SH’s and
75
Q

How can they do this? (2)

A

-Eliminate the board and run the corporation directly. -EITHER BY:

76
Q

What happens when a harmed minortiy SH in a Close C is oppressed? (2)

A
  1. Probably a breach of fiduciary duty by the controlling shareholders (who have fiduciary duties in most JX’s).
77
Q

Licensed professionals, including lawyers, medical professionals, and CPAs, may incorporate as?

A

-A “professional corporation” or “professional association.” The name must have one of those phrases or “P.C.” or “P.A.”

78
Q

Generally SH’s are not liable for the debts of a corp unless?

A

*the corp veil has been pierced

79
Q

PCV Standard- Nevada courts will pierce the corp veil if the stockholder? (3)

A

-Acts as the alter ego of the corp.

80
Q

3 Ways the Corporate Veil Can be Pierced?

A
  1. Use of corporate assets- X commingles personal and corp funds; uses the corp car as his own; uses corp credit to pay for personal purchases; C corp fails to pay for bills.
81
Q

SHAREHOLDER DERIVATIVE SUITS (SHAREHOLDER AS PLAINTIFF)

A

In a derivative suit, a shareholder is suing to enforce the corporation’s claim, not her own personal claim. It’s a case in which the corporation is not pursuing its own claim, so a shareholder steps in the shoes of the corp to bring suit to responsible party (in other words, the board will not authorize a suit against the corp). ALWAYS ASK:

82
Q

S, a shareholder of C Corp., sues the board of directors of C Corp. for usurping corporate opportunities. Is that a derivative suit?

A

YES—duty of loyalty (and care) are owed to corporation so corporation could have brought this suit for breach of duties owed to it.

83
Q

S sues board of directors of C Corp. for issuing new stock without honoring her preemptive rights. Is this a derivative suit?

A

No. This is a SH personal claim. Corporation not hurt, so couldn’t have brought suit.

84
Q

To bring a derivative suit you must have 3 things:

A
  1. stock ownership when the claim arose AND throughout the suit.
85
Q

-If the board made a business decision that is being challenged?

A

The Plaintiff SH must allege particularized facts demonstrating a reasonable doubt that the directors were disinterested or that the BJR otherwise protects the challenged decision

86
Q

-If the board made no business decision, but simply failed to act, and that failure is being challenged?

A

The plaintiff SH must allege particularized facts demonstrating a reasonable doubt that the board can impartially consider a demand.

87
Q

Additional Items Req’d for derivative Suit

A
  1. Complaint must be verified and must plead specific facts
88
Q

What happens to SH if wins/loses derivative suit?

A

If WINS: Corp gets money from judgment, SH gets costs and attorneys fees–usu from judgment won.

89
Q

-The record shareholder?

A

GENERAL RULE: The “record shareholder” as of the “record date” has the right to vote.

90
Q

3 Exceptions to the general rule that record owner on record date votes?

A
  1. The corporation re-acquires stock before the record date, so it is the owner of this “treasury stock” as of the record date. Treasury stock does not vote.
91
Q

What is a Proxy? (4)

A

A Proxy is a

92
Q

-Unless?

A

Proxies good for 6 months UNLESS the proxy states otherwise; max duration of 7yrs

93
Q

Voting Trusts and Agreements

A

SH’s ability to increase their influence by block voting (e.g. voting as a group)

94
Q

Requirements for voting trust. (4)

A

(Nevada = 15-year maximum.)

95
Q

Requirements for voting (“pooling”) agreement.

A
  1. SH’s can enter into voting agreements.
96
Q

Shareholders take action by (2)

A
  1. Shareholders usually take action at a meeting that must satisfy all quorum and voting rules
97
Q

There are 2 kinds of shareholder meetings.

A
  1. Annual meeting: to elect directors. If none held in 18 months of the last annual meeting, a shareholder w/ 15% of the shares entitled to vote may ask the court to order an annual meeting.
98
Q

Ten percent of the shares call a special shareholder meeting to remove an officer. OK?

A

Yes ok to call the special meeting. BUT NO on removal because not a SH function.

99
Q

-Contents of notice must state?

A
  1. must give written notice (fax or e-mail OK) to every shareholder entitled to vote. Deliver it between 10-60 days before the meeting.
100
Q

-Consequence of failure to give proper notice to all shareholders? Unless? (2)

A

Action taken at the meeting is void unless those not sent notice waive the notice defect.

101
Q

How Do Shareholders Vote?

A

(1) There must be a quorum represented at the meeting. Determination of a quorum focuses on the NUMBER OF SHARES represented, not the number of shareholders.

102
Q

In a shareholder meeting, if quorum requirement is met?

A

An action will be deemed approved if the votes cast in favor of the action exceed the votes cast against the action (unless the articles provide for a greater voting requirement).

103
Q

You vote by Shares, not People. X Corp. has 120,000 shares outstanding. X Corp. has 700 shareholders. What or who constitutes a quorum?

A

60,001 voting shares.

104
Q

X Corp. has 120,000 shares outstanding. 62,000 shares are represented at the meeting, but only 50,000 shares vote on a particular proposal. How many shares must vote for the proposal for it to be accepted by the shareholders?

A

25,001

105
Q

How and When do Shareholders use CUMULATIVE VOTING? (3)

A

RARELY TESTED IF EVER

106
Q

-It also requires? (2)

A
  • Reasonable under the circumstances (means there cannot be an absolute prohibition on transferability).
107
Q

SH demand to see books and records requires?

A
  1. STANDING: generally any SH can demand access.
108
Q

-IF the corporation fails to allow proper inspection, the shareholder can?

A

-Seek a court order. If she wins, she can recover costs and attorney’s fees incurred in making the motion.

109
Q

SH Distributions Explained

A

These are payments by the corporation to shareholders. There are different types of distributions:

110
Q

-An action to compel declaration of a distribution is?

A

-Board’s discretion. There is no right to a distribution until it is declared.

111
Q

Common Stock

A

The BOD declares dividends totaling $400,000.

112
Q

Preferred Share

A

The BOD declares dividends totaling $400,000.

113
Q

Preferred Participating Stock

A

The BOD declares dividends totaling $400,000.

114
Q

Cumulative Dividend

A

The BOD declares dividends totaling $400,000.

115
Q

For any distribution (dividend, repurchase, redemption) which funds can be used? MODERN VIEW

A

The modern view does not look at the funds. It says a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent. Insolvent means either:

116
Q

Distributions–Liability of Directors

A

Directors are jointly and severally liable for improper distributions. Remember, however, the directors’ good faith reliance defense.

117
Q

A. These are extraordinary, so the board cannot do them alone. We need four things: (4)

A
  1. Board action adopting a resolution of fundamental change.
118
Q

Dissenting shareholder right of appraisal. What is this? When do you have it? (3)

A

RIght to force the C to buy your stock for “fair value.”

119
Q

Dissenting shareholder right of appraisal is not available if? (2)

A

Right is not available. If:

120
Q

What does the shareholder have to do to perfect her right of appraisal? (3)

A

1) Before shareholder vote, file with the corporation written notice of objection and intent to demand payment;

121
Q

Amendment of the Articles Requires? (2)

A

(1) Board of director action and Notice to shareholders and

122
Q

Amendment of the Articles If Approved?

A

If approved, deliver amended articles to the Secretary of State.

123
Q

Mergers or Consolidation - Requires 3 Things?

A
  1. BOD ACTION (both corporations), and
124
Q

Mergers or Consolidation: If Approved?

A

If approved, surviving corporation DELIVERS articles of merger or consolidation to the Secretary of State.

125
Q

Effect of merger or consolidation?

A

Surviving corporation succeeds to all rights and liabilities of the constituents= successor liability

126
Q

Transfer of ALL OR SUB ALL OF THE ASSETS not in the ordinary course of business or share exchange

A

These are fundamental corporate changes for the seller only, not the buyer.

127
Q

Transfer of ALL OR SUB ALL OF THE ASSETS not in the ordinary course of business or share exchange: What do you Need?

A

1) Board of director action (both corporations),

128
Q

Dissolution: Voluntary (4)

A
  1. Board of directors action and approval by a majority of the shares entitled to vote.
129
Q
  • A shareholder can petition for involuntary dissolution because of: (5)
A
  1. gross mismanagement, fraud, or collusion of directors
130
Q
  • Who can petition for dissolution on these grounds?
A

10% SH OWNER

131
Q
  • Instead of dissolution?
A

Any creditors holding 10% of o/standing debt or SH’s owning 10% of all the shares entitled to vote in the cort can apply for appt of a receiver because the corp is conducting business at a great loss.

132
Q

Dissolution= End of corporation?

A

Dissolution is not the end of the corporation. It is the beginning of a process that will end the corporate existence. The task now is to wind-up (liquidate).

133
Q

Dissolution= Winding Up Consists of? (4)

A

(a) gathering all assets,

134
Q

Securities Are?

A

INVESTMENTS.

135
Q

Debt Securities?

A

The investor lends capital to the corporation, to be repaid (usually with interest) as specified in the agreement.Therefore a creditor, not an owner. .

136
Q

Equity Securities?

A

Investor buys stock from the corporation, which generates capital for the business. Owner, not a creditor.

137
Q

Rule 10b-5: AIMED AT…?

A

DECEIT- This federal law prohibits fraud or misrepresentation (or nondisclosure) in connection with the purchase or sale of any security (debt or equity). Elements:

138
Q

Rule 10b-5: At some point, the deal must use an?

A
  1. “instrumentality of interstate commerce” (mail, telephone, or trade on a national exchange).
139
Q

Rule 10b-5: Type? (4)

A
  1. Misrepresentation of material information.
140
Q

10b-5 Materiality

A

The misrepresentation or omission must concern a “material” fact- one a reasonable investor would consider important in making an investment decision.

141
Q

10b-5 Possible Plaintiffs and D’s (3)

A

P’s:

142
Q

10b-5: Potential Defendant’s?

A

D’s: “any person” including entities

143
Q

—L, a lawyer for X Co., learns that X Co. is planning to merge with Y Corp. She telephones her son-in-law Joe about this, and urges him to buy X Co. stock. Acting on the tip, Joe buys the stock. Any violations of rule 10b-5?

A

L is a tipper because: (1) she passed along material inside

144
Q

—D is a director of C Corp. While waiting for a concert to start, D tells her husband about a new, secret processing method that C Corp. has just developed. Bobbitt, who is sitting in the next row, overhears the conversation and buys C Corp. stock on a national exchange. Any violations of 10b-5?

A

– NO. At worst, D was merely negligent, which is not enough for

145
Q

MENTAL state for 10b-5 liability

A

Scienter. D must have an intent to deceive, manipulate, or defraud. Recklessness may suffice.

146
Q

RELIANCE and 10b-5

A

Reliance. Said to be a separate element, as in fraud cases, but is presumed in public misrepresentation (e.g., a misleading press release) and nondisclosure cases.

147
Q

RULE 10b-5 Elements according to Sakai

A
  1. Private P must show the following:
148
Q

RULE 10b-5 Defendants according to Sakai

A
  1. Insider Trading
149
Q

Rule 10b-5: Insider Trading

A

An insider breaches 10b-5 if by trading he breaches a duty of trust and confidence owed to:

150
Q

Rule 10b-5: Tipper Liability

A

If an insider gives a tip of inside info to someone else who trades on the basis of the inside info, the tipper can be liable under 10b-5 IF:

151
Q

Rule 10b-5: Tippee Liability

A

A Tippee is liable under 10b-5 IF

152
Q

Misappropriation Theory (alternative to 10b-5) according to Sakai

A

Brought by government against any trader who:

153
Q

SECTION 16B:

A

AIMED AT SPECULATION BY DIRECTORS, OFFICERS, AND TEN PERCENT SHAREHOLDERS.

154
Q

When does 16b apply?

A
  1. “Reporting” corporation- (1) listed on a national exchange or (2) at least 500 shareholders and $10,000,000 in assets
155
Q

What happens when 16b applies?

A

All “profits” from such “short-swing trading” are recoverable by the corporation. If, within six months before or after any sale, there was a purchase at a lower price, there is a profit.

156
Q

—D is a director of Acme, Inc., which is a reporting company. In 2007, D bought 700 shares of Acme stock for $10 a share. In January 2012, D sold 700 shares for $6 a share. In March 2012, D bought 200 Acme shares for $1 a share. What result? Doesn’t look like a profit in real-world terms. BUT D owes the corporation $1,000.

A

Focus on the Sale: sale was Jan 2012 and sold for $6.

157
Q

Sarbanes-Oxley Act of 2002

A
  1. Only a public accounting firm registered with the Oversight Board may prepare or issue audit reports with respect to a registered company.

Business Associations (3 decks)

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