Corps Flashcards
Promoter Liability for Pre-Incorporation Agreements
Absent express or implied agmt to contrary, promoter personally liable absent novation (mere adoption of K by corp after formation insufficient)
Promoter’s Fiduciary Duty to Corporation
Promoter must act in good faith + can be liable to corp for breach of fid duty, such as failing to disclose a comm’n
Promoter’s Right to Reimbursement
- Formation costs; + 2. Any pre-incorporation agmts for which promoter personally liable, to extent corp received benefit
Corp’s Liability for Pre-Incorporation Transactions
Not liable unless corp adopts
Adoption occurs when corp accepts benefits of transaction; corp liable as of adoption date, not original K date
Incorporator Liability for Pre-Incorporation Transactions
Incorporator (ie: person who signs and files arts of incorp w/ state) has no liability
A de jure corporation is formed when…
- 2 copies of A of I filed w/ Dept of State + fees paid
- corp must also advertise intent to file or filing of A of I in 2 newspapers
Articles of Incorporation must include…
- Names, adds + sigs of incorporator(s)
- Corp name (“corp,” “company,” “ltd.”)
- Name/add of registered agent w/in PA
- # of authorized shares + sttmt of rights associated w/ different classes, if available
- Statement that incorporated under PA BCL of 1988
- Duration, if not intended to be perpetual
*No statement of purpose req’d; PA presumes corp has a lawful purpose + can conduct all lawful business
Three ways to challenge an ultra vires action by corp…
- SH
- corp v. D/O
- State
Fact that corp acted ultra vires not a defense to…
- enforceability of a K, by either side.
- By statute, charitable contributions never ultra vires
Defective Incorporation
If owner made g-f effort to incorp + operates as corp w/out knowing req’ts not met, may escape personal liability under 2 theories:
- de facto incorp (focus on owner)
- corporation by estoppel (focus on 3d p)
Types of Stock
- Every corp is req’d to have common stock, entitled to vote on matters of corporate governance
- May also create different classes to give different voting rights or rights upon corp dissolution (ie: preference in dividends + upon dissolution)
Issuance of Stock: Authorization
Stock cn be sold or traded by corp unless listed in A of I; if Bd wants to sell more, must propose amendment to Articles
Shareholder Preemptive Rights
- SHs of statutory close corp have preemptive right to purchase voting shares to maintain same percentage of ownership
- A of I can also expressly provide such rights for non-close corp
Distributions – Authorization
Board of directors authorizes; SH cannot compel unless board abuses discretion + refuses to declare a distribution in bad faith
Limits on Distribution: 2 Tests for Insolvency (must pass both)
- equity test: corp must be able to pay its debts as they come due
- balance sheet test: total assets must exceed total liabilities plus liquidation preferences of senior securities
Director’s Liability for Unlawful Distributions
- If violation of duty of care or loyalty (ie: not protected by BJR), D personally liable to corp for amt in excess of lawful amt
- D entitled to contribution from any other liable D + entitled to recoup SH’s pro rata proportion of distribution if SH knowingly accepted
Close Corp Restrictions on Stock Sales
- Owners of close corp can restrict in order to maintain control
- Outright prohibition + consent req’ts may be challenged as unrsnble restraints on on alienation, but test is one of reasonableness
- Purchaser not bound by terms of restriction unless constructive/actual knowledge
SHs generally dn owe duty to fellow SHs or corp, but controlling SHs may…
- be liable for damages caused by selling to looter
- have duty of loyalty (ie: no interested transactions
- have fiduciary duty (ie: may be liable for freezing out minority SHs if for purpose of continuing biz for own benefit)
SEC R. 10b-5: MOM SPARD + PJS
Privity
Jurisdiction (interstate commerce–anything but face-to-face)
Standing (P must have bought or sold; refraining insufficient)
R. 10b-5 Actions: Bespeaks Caution Doctrine
Statement of opinion or prediction that is accompanied by adequate cautionary language DN constitute a false or misleading statement
R. 10b-5 Action: Insider Trading
Person who is in possession of info at time he makes a trade presumed to have traded on basis of that info unless trade made in accordance w/ pre-existing written plan
Section 16(b) of Securities + Exchange Act
*No showing of inside info req’d; concern is short-swing profits only
- Corp traded on nat’l security exchange or have more than $10m in assets + 500 SHs
- Only corp insiders: Os, Ds + SHs w/ more than 10% stock
- Liable for any profits made when buys + sells w/in 6 mo period
Amending Articles of Incorporation
- if no stock issued, bd of directors (or incorporators) may amend
- if stock issued, bd must propose and SHs approve
Special SH Meetings
In add’n to annual meeting, Ds or owners of 20% of shares may call special meeting; must give notice 5 days in advance, unless meeting involves fundamental change, then 10 days
SH Voting
- Elect bd + approve fundamental changes (mergers, stock exch, sale of all/most assets, amend A of I)
- Quorum generally requires majority of shares eligible to vote (not SHs)
- Once quorum met, only majority of votes case must vote in favor (plurality for election of bd)
Cumulative Voting for Bd of Directors
Permitted if not expressly prohibited; SHs given # of votes equal to # of shares x # of positions
Collective Voting by SHs
- Voting pool: binding voting agmt that may be specifically enforced
- Voting trust: legal ownership of shares transferred to trustee who votes + distributes dividends in accordance w/ terms of trust
SH Right to Inspect Corporate Books/Records + SH List
Must be for purpose relating to SH’s interest in corporation; burden on SH for books/records; for SH list, corp must show improper purpose
Direct SH Action
- Action to enforce shareholder rights (interference w/ voting rights, bd’s failure to declare dividend, or bd’s approval/failure to approve merger)
- Mismanagement must be brought derivative
Derivative SH Action
- Recovery goes to corp (SH may get expenses if substantial benefit to corp)
- Standing: (i) SH owned shares from time of wrong through disposition of case; + (ii) made a written demand on Bd to enforce corp’s rights, unless demand would cause irreparable injury to corp
Piercing Corporate Veil: Factors to Determine if Corp Mere Alter Ego of SHs
- uncapitalization of corp in light of anticipated liabilities**
- disregard of corp formalities (ie: meetings, minutes)
- use of corp assets as SH’s own assets
- wrongful, misleading, or fraudulent dealings w/ corporate creditor
*easier to pierce in tort cases than K + in parent/sub context; PA cts strongly opposed, but will permit it; only SHs that were active in operation of corp’s biz personally liable
Removal of Director from Bd
- Generally, SHs can remove D w/ or w/out cause at any time; exceptions: (i) Ds on classified bd only for cause; (ii) D elected by cumulative voting cn be removed when votes sufficient to elect him cast against removal
- By Bd only if judicially declared to be of unsound mind or convicted of felony
Board of Director Voting Requirements
- Majority of all Ds constitutes quorum; unlike SHs, D must be present at time of vote to be counted for quorum; unless otherwise specified, majority of those voting must approve
- D present at meeting presumed to have assented unless dissents on record or in writing submitted to sec during or immediately after meeting
Corp Director Duty of Care: General Standard
- Ds must act w/ care of an ordinarily prudent person in a like position under similar circs
- laziness not enough if no harm to corp
Corp Director Duty of Care: Reliance Protection
Entitled to reasonably rely on info, opinions of: Os + other employees; outside attys, accountants, or other experts retained by corp; and committee of bd of which D not a member
Corp Director Duty of Care: BJ Rule
- Rebuttable presumption D reasonably believed actions in best interest of corp
- To overcome, must show: 1. failure to inform; 2. self interest; or 3. lack of good faith
Duty of Loyalty: General Rule Against Self Dealing
Any transaction w/ corp from which D or relative benefited must be set aside unless protected by safe harbor rules + transaction ultimately fair; D must also pay damages to corp in form of profits
Duty of Loyalty: Safe Harbor Rules
- approval by majority of disinterested bd members (interested member counts for quorum)
- approval majority of disinterested SHs
- fairness of transaction
*satisfaction removes presumption of invalidity, but ultimate test is fairness
Usurpation of Corporate Opportunity
- D violates duty of loyalty if doesn’t first offer opportunity to corp
- “Corp Opp” if: (i) corp had interest/expectation or in corp’s line of biz; or (ii) came to D thu corp
- Remedy: impose a constructive trust for benefit of corp
Corporate Director/Officer Indemnification
- Mandatory if D/O successfully defends
- Prohibited if D/O received an improper financial benefit
- Permitted if D/O unsuccessful in suit but: (i) acted in good faith; or (ii) in criminal case, dn have reasonable cause to believe conduct unlawful
Corp Governance: Officers
- PA requires pres, sec + treasurer (1 may hold multiple)
- Actual authority = express + implied
- Apparent authority if 3d p reasonably believed would have authority
Corp Officer Liability
PA follows participation theory as basis of liability; corp officer must have participated in act personally, cooperated w/ another, or directed another
Statutory Req’t for Mergers (same for seller of all/substantially all assets)
- Resolution by Bd
- Written notice to SHs
- Approval by maj of SHs of both corps who cast votes at meeting where quorum present
*No SH approval for short-form merger (80% subsidiary); only Bd of parent
Asset Acquisition
Sale of assets dn require approval by SH or Bd of transferor corp unless resemble merger, i.e., a transfer involving all or substantially all assets outside usual + regular course of biz, in which case same process as merger for seller
Stock Acquisition
No merger if corp acquires sufficient stock to have controlling interest in another corp so long as both entities continue to exist
Dissenting SH’s Right to Buyout
SH entitled to vote on any fundamental change may force buyout at FMV; also for short-form merger even tho no rt to vote
4 steps: Notice before vote, not vote in favor, written demand for payment after vote, FMV (if no agmt, determined thru ct action)
Voluntary Dissolution of Corp Prior to Issuance of Stock
- no biz transacted 2. all debts paid or provision made therefor 3. money received and any subscriptions returned 4. dissolution approved by majority of SHs and/or incorporators
Voluntary Dissolution of Corp After Issuance of Stock
- Bd adopts proposal for dissolution and 2. majority of SHs approve
- Corp continues to exist for limited purpose of winding up its affairs and liquidating its biz
- SHs entitled to equal distribution of assets after debts paid
Involuntary Dissolution of Corporation
- Action may be brought by AG, SH, director, or creditor
- SH: (i) corp assets being wasted; (ii) Ds acting illegally, oppressively, or fraudulently; (iii) Ds deadlocked; (iv) SHs deadlocked
- Ct may grant dissolution or appt custodian to investigate best solution
Corporation: Forfeiture
State may force corp to forfeit right to exist if fails to pay fees or taxes, file req’d notices or reports, or abuses its powers; if continues to operate as corp, personal liability
LLC
- Taxed like a corp for state tax purposes, but federal tax benefits
- Owners = members, who are presumed to all manage; LLC bound by actions of single member
- Liability of owners limited to amt of investment
- Same general principles of corp law apply
Replacement of D on Bd if vacancy or Bd enlarged
can be done by Bd or SHs
Market-out exception to dissenting SH’s right to buy out
not available if: (i) corp stock listed on nat’l exchange or (ii) held by more than 2,000 SHs
Par value of stock
minimum price for which can be sold; if corp dn receive full par value, buyer liable + Ds if knew full value not paid
Annual SH Meeting
- Corp req’d to hold meeting once/yr to elect Ds + address other SH biz
- If fails to hold w/in 6 mos of designated time, any SH entitled to call meeting
- Ds must fix record date no more than 90 days before
Bd of Director: Committees not allowed to make major decisions on behalf of bd, such as:
- declare distributions
- recommend actions directly to SHs that require SH approval
- create/fill bd vacancies
- adopt, repeal, or amend bylaws
Statutory Close Corp: Deadlock
Ct may appt custodian if SHs deadlocked + biz threatened w/ immediate + irreparable injury
Fiduciary Duty of Controlling SH
attempt by majority SHs to ‘freeze out’ minority for purpose of continuing enterprise for benefit of majority = breach of fiduciary duty to minority SHs
