Corps Flashcards
Corp formation: De jure
Meets all statutory requirements, including (1) incorporators sign and (2) file an articles of incorporation with the secretary of state that includes:
- Agent’s name for corp
- Corp’s address and name and purpose
- Authorized # of share
Corp formation: If there’s a failure to formally incorporate … De facto corp
- If good faith effort to incorporate AND
- Person operates bus. w/o knowing requirements were not met, the business will be treated as a “de facto” corp
Effect: law will treat defectively formed corp as an actual corp (SH’s not liable for corp obligations)
Corp formation: If there’s a failure to formally incorporate … Corp by estoppel
- Person who deals with bus. believing it’s a corp., OR
- one who incorrectly holds bus. out as a corp, may be estopped from denying corp status (protects shareholders from being liable).
Piercing corp veil (can shareholders be personally liable?) (AUSSFE)
To determine whether to pierce the corporate veil, court looks at the totality of the circumstances, including:
- Alter ego (corp. formalities ignored or commingling)
- Undercapitalization of corp at time of formation
- Self-dealing w/ corp
- Stripping corp assets
- Fraud (where corp is formed to commit fraud)
- Estoppel
Effect: SH’s will have joint and several liability
Deep rock doctrine
when a corp is insolvent, third party creditors may be paid off before shareholder creditors, thus subordinating the shareholder claims.
Corp purpose: ultra vires
If corp has limited stated purpose and it acts outside its that purpose, it is acting “ultra vires.”
*SH can file suit to enjoin action and/or corp can take action against director who engaged in act
Issues of shares of stock in corp must be
authorized by BOD
Shares of stock: valuation
BOD must determine that the consideration (e.g., money) paid for the stock is adequate.
Shares of stock: stock subscription agreement
K where a subscriber makes a written promise agreeing to buy a specified number of shares of stock (can happen before or after incorporation).
Shares that are sold are
Issued and outstanding
Shares that have yet to be sold are
Authorized but unissued
Shares of stock are
equity securities that give SH ownership interest in corp
Shares of stock: Types of shares
Art. of incorp. can provide diff classes of stock available (common or preferred)
Shares of stock: consideration
Consideration required in exchange for stock shares
Traditional par value stock approach:
In the process of incorporating, corp may issue par value stock (corp is required to receive at least the value assigned to the stock, the par value, which can be small amount.
Sale of stock below par value
If BOD issues (sells, trades) par value stock for below par value, BOD is liable for difference.
*An SH that knowingly received par stock for below par value is also liable to the corporation.
Board’s good faith for shares of stock
BOD’s good faith determination of the price is conclusive.
Treasury stock
stock that was previously issued and has been reacquired by corp. It can be sold for less than par value and is treated like no par stock.
Preemptive rights
Right of existing SH to maintain her percentage of ownership in a corp when there’s a new issuance of stock for cash.
Unless the articles provide otherwise, a shareholder does NOT have preemptive rights.
Liability for promoter K’s rule
A promoter is personally liable for a contract entered into pre-incorporation, even after the corporation comes into existence, except:
- Novation: substitute agreement between all relevant parties to extinguish the original contract, thereby releasing the original obligor of liability.
- Adoption: corp may expressly or impliedly adopt a contract after it has been validly formed. Once adopted, the corporation becomes liable on the contract. However, adoption does not relieve the promoter of liability absent a novation.
Promoter duties
Promoter has a fiduciary relationship with the proposed corporation requiring good faith. Promoters cannot make a secret profit on their dealings with the corporation.
Officers (carry out operations, appointed by BOD) have authority to act on behalf of corp based on agency law principles
An officer’s authority to bind the corp may be express, implied or apparent.
- Express: specifically granted to the officer by the corp (defined by bylaws or set by BOD)
- Implied: corp officer reasonably believes corp gave him authority
- Apparent: corp has provided the officer with the appearance of authority on which a 3p reasonably relies.
*tip: if it’s a big business decision like purchasing a tract of land, then officer doesn’t have authority
Removal of directors and officers
- Director: can be removed for breach of duty or without cause by majority vote of SH’s
- Officers: board may remove officer w or w/o cause. *Resignation allowed at any time
Acts of BOD at meeting rule
For BOD’s acts at a meeting to be valid, a quorum of directors must be present at the meeting.
- Quorum = majority of all directors who do NOT have a personal interest in the transaction. If no quorum achieved, action invalid.
*to ratify a transaction where a director had a personal interest, board would need to be provided of all facts of transaction
Acts w/o meetings rule
An act may be taken w/o a meeting if all directors sign a written consent.
Duties of directors and officers
Owe duty of care, duty of loyalty and duty of disclosure
Duties of directors and officers: DOC
D’s and O’s have a duty to act like a reasonably prudent person in similar circumstances.
*Triggers BJR
Duties of directors and officers: DOC and BJR
(BJR) is a rebuttable presumption that a director reasonably believed his actions were in the best interest of the corporation. The BJR will protect a director from liability for breaching the duty of care if he acted in good faith. To overcome the BJR, one of the following must be shown:
- D did not act in good faith,
- D was not informed to extent necessary before making decision
- D did not show objectivity, had material interest in decision
- D failed to timely investigate
- Any other failure to act as reasonable director
Duties of directors and officers: DOL
Directors and officers owe a duty of loyalty to the corporation where they must put the interests of the corporation above their own interests. DOL arises in three ways:
- Self-dealing (IDT)
- Usurping corp opp
- Unfair competition
Duties of directors and officers: DOL Self-dealing & Safe harbor rule
D engages in transaction with a corp that benefits himself or family or other corp he has relationship with. Self-dealing Ks presumed unfair but can be cured under safe harbor rule if:
- Approved by maj. of disinterested board members OR SH’s after disclosure, or
- transaction is fair to corp.
Duties of directors and officers: DOL Usurping corp. opp.
D may violate the DOL by “usurping” a corporate opportunity for bus. and taking the opportunity for himself rather than offering it to the corporation first.
- First determine if it’s corp opp. (did corp seek opp or is it in corp’s line of business?)
- If it is, then D must present to corp and have it declined. D can take opp for himself without violating DOL
*If D usurped, then corp can compel D to turn over opp and disgorge profits
Duties of directors and officers: DOL Unfair comp.
A director or officer may not unfairly compete with the corporation
D and O: Indemnification (compensation for harm or loss)
- Mandatory: : D or O can get indemnification for expenses incurred on behalf of corp, and for expenses incurred if he prevails in a proceeding brought against him by corp.
- Discretionary: corp may indemnify D or O for unsuccessful proceedings against them only if D or O acted in good faith and believed their actions were in best interests of corp
D and O: inspection
Right to a reasonable inspection of corp records or facilities.
Rights of SH’s: Meetings
Meetings are typically where shareholders convene and vote on corp management issues. 2 types:
- General or annual meetings where most SH voting occurs. Annual meeting required (primary purpose is to elect directors) up to 60 days notice required
- Special meeting: can be held upon reasonable notice of the time, place, and business to be discussed (10-60 days’ notice required and purpose).
Rights of SH’s: Voting
SH’s have only indirect corp power through (1) right to vote to elect or remove members of the board and (2) approve fundamental changes in corp structure, like mergers, dissolutions, etc.
Rights by SH’s: Voting by proxy
SH can vote in person or by proxy. A proxy is a signed writing (can be electronic) authorizing another to cast a vote on behalf of SH, valid for 11 months.
- Generally revocable, but can be irrevocable if it states it’s irrevocable and person who is receiving SH’s right to vote gives something of value in exchange to SH
*Directors CANNOT vote by proxy
Rights by SH’s: Voting and quorum
For an act to pass there must be a quorum (majority of outstanding shares represented) at the meeting.
- Quorum = # of shares, NOT shareholders, and a majority of votes cast validates proposed SH action.
*Votes re: fund. changes require maj. vote of ALL outstanding shares (higher std)
SH’s & unanimous written consent
SH may take action with unanimous written consent of all SH’s.
SH’s right to inspection
SH has a right to inspect and copy corp. records with 5 days’ written notice.
- No purpose req’d: AOI, meetings minutes, annual report to state, written comms between SH’s
- Proper purpose req’d in good faith (records must be related to purpose): financial statements of corp, accounting records of corp, record of current SH’s, meeting minutes of BOD
SH’s and Dividends
Dividends are cash, property or stock that a SH may receive from the corp.
- given at board’s discretion. Distribution NOT allowed if it would lead to insolvency or not allowed in articles.
To prevail in a suit to compel a dividend, a shareholder must
(1) sufficient funds available for the payment of a dividend and
(2) bad faith on the part of the directors in their refusal to pay.
SH agreements
- Voting agreement: governs how SH will vote their shares
- Management agreement: governs how SH’s will manage corp
- Restrictions on stock transfers: generally upheld if reasonable but no absolute restraints allowed
More on Voting Agreements (for SH’s and Directors)
- SH’s may enter into a binding voting agreement (i.e., voting pool) which governs how they will vote their shares (e.g., how they will appoint directors), if it is in writing and signed by the parties. The agreement is a contract and may be enforced; there is no time limit.
- BUT, an agreement between DIRECTORS as to how to vote (i.e., a pooling agreement) is unenforceable because this would impair a director’s duty of care and independent judgment if bound to a voting (Each director is expected to exercise independent judgment)
- Voting agreements can be binding on successors of interest if they have notice of it.
- Cumulative voting allowed if in AOI.
SH suit: Direct
SH may sue corp for breach of a fiduciary duty owed to the shareholder by a director or an officer.
- E.g., denial or interference with a shareholder’s voting rights, the board’s failure to declare a dividend, or the board’s approval or failure to approve a merger.
SH suit: Derivative (demand requirement)
SH suing on behalf of corp for harm suffered by corp.
- Recovery generally goes to the corporation but SH is entitled to reimbursement for expenses of litigation.
SH suit: Derivative (demand requirement) Requirements
SH bringing suit must
- Own stock at time claim arose,
- Adequately rep. corp.
- Make a demand on directors to bring suit and redress injury or demand rejected (corp has 90 days to respond unless emergency) UNLESS he can show demand would be futile
E.g., SH brings derivative action to force director to disgorge secret profit
SH fiduciary duties
- General rule: SH owes NO fiduciary duty to the corporation or other shareholders.
- Modern trend: Controlling SH’s (lot of voting strength) owe a duty of care and duty of loyalty to the corporation and its minority shareholders (can’t use the position to gain a personal benefit at the expense of minority SH’s, e.g., maj. SH selling its own shares)
SH liability
SH’s not personally liable for acts of corp, subject to piercing corp veil
16(b)–No short swing profits rule
Approach
(1) State rule: Any short swing trade profits received within 6 months by a corp insider must be disgorged to the corp.
(2) Is there a corp insider? Corp insiders are officers, directors and SH’s owning 10% or more equity stock in corp.
(3) did they make a profitable purchase and sale?
*E.g.: P made a profit by engaging in buying and selling stock within a six month period and is thus liable for insider trading. P had a short swing profit of $250,000 and that must be disgorged to corp.
Section 10b-5 (no insider trading) general rule
Rule: Section 10b-5 provides liability for any person who employs fraud or deception to buy or sell any security by means of an instrumentality of interstate commerce (can be thru phone or mail). Must show fraud and direct trading by insider.
*Trading securities based on nonpublic corp info is not allowed. Must show
- Fraud AND
- Direct trading by insider or,
- Tippers, or
- Tippee, or
- Misappropriator
Section 10b5: Fraud
- Intentional misrepresentation of a material fact
- Actual reliance on fact
- Purchase or sale of securities
- Interstate commerce (trade must involve some sort of IC, like telephone, mail, etc.)
- Damages
Section 10b5 can be violated by four ways: Direct trading by insider
- An insider is D, O, E, or SH that holds material, nonpublic info (have duty to refrain from trading and to disclose material, nonpublic info to corp)
Section 10b5 can be violated by four ways: Tippers
- Tippers are those that providing insider info and are liable if info was shared for personal gain
Section 10b5 can be violated by four ways: Tippees
Tippees are those receiving insider info and are liable ONLY IF tipper breached fiduciary duty, tippee knew duty had been breached, and tipper personally benefitted.
Section 10b5 can be violated by four ways: Misappropriators
Those obtaining corp private info through other means may be in breach of duty owed to source of info
Sarbanes-Oxley Act
Sets standards for publicly traded companies by creating a board that oversees public accounting firms that perform audits and create rules pertaining to corp financial reporting.
Sarbanes-Oxley Act enhanced reporting requirements
- audit board must be established by each corp
- Senior execs take ind. resp. for accuracy of financial reports
- if filing inaccurate, corp has to restate financial report
Criminal penalties:
- destroying or altering corp documents (prison and fine)
- securities fraud (prison)
- whistleblowers given protection
Corp fund. change
Must be approved by a majority shareholder and majority director vote. Typical procedure:
- Board adopts resolution
- Written notice given to SH’s
- SH approve change by maj. vote
- Change updated in articles, filed with state
E.g., merger, share exchange, asset sale, conversion, amendment of bylaws
Dissolution
A corp may voluntarily terminate its status (requires majority vote by directors and shareholders and fundamental change procedure must be followed).
*State can also force to dissolve bc of admin failures
*Judges can force dissolution bc of fraud
Winding up
A dissolved corp may continue to exist for the limited purpose of winding up its affairs and liquidating its business.
Corp assets distributed in this order:
- creditors of corp
- shareholders of stock with preferences in liquidation
- other remaining SH’s of stock
