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Corporations > General > Flashcards

General Flashcards

1
Q

stock subscriptions

A
  • ask people to agree in advance to buy stock before corporation formed
  • prior to incorporation: subscription agreements are irrevocable for 6 months
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2
Q

preemptive rights

A
  • right to acquire stock to maintain the percentage of ownership
  • default rule: shareholders do not have preemptive rights unless negotiated or included in the articles
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3
Q

what are the two ways to get money out of a corporation (distribution)?

A
  • board can declare a dividend
  • board can buy back shares of the corporation
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4
Q

who has the right to authorize dividends?

A

board of directors

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5
Q

when can the board of directors not distribute dividends?

A
  • if corporation is insolvent OR
  • if, by issuing the dividend, the corporation would become insolvent
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6
Q

what happens if the board of directors authorize unlawful dividends?

A

board of directors who vote to authorize the unlawful dividend are personally liable, jointly and severally, to the corporation for the amount in excess of the lawful amount
UNLESS director relied in good faith on financial statements

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7
Q

participating preferred shares

A

each share in the class collects a dividend as part of the preferred class and then collects an additional amount together with the common class

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8
Q

preferred shares

A

when there is a dividend, they get preference for the amount of divident preference they have (and then the remaining goes to the holders of common stock)

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9
Q

cumulative preferred shares

A

when there is a dividend, they get preference for the amount of divident preference they have for that year AND for any prior year where no dividend was issued (and then the remaining goes to the holders of common stock)

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10
Q

what are the two possible types of restrictions on the sale of securities?

A
  1. closely held corporations (private restrictions on the sale of securities)
  2. federal restrictions
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11
Q

what are the requirements for a closely held corporation to put restrictions on the sale of its securities?

A
  • restrictions must be conspicuously noted (stock certificate contains conspicuous statement or restrictions will be provided on request)
  • types of restrictions: outright prohibition, requires company consent, company has option to buy, company has right of refusal
  • upheld if reasonable
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12
Q

what is necessary to bring a Rule 10b-5 action?

A
  • P purchased or sold the security
  • transaction involves interstate commerce
  • D engage in fraudulent or deceptive conduct (NOT opinions or predictions)
  • conduct related to material information (reasonable investor would think important)
  • D acted with scienter (intentional or reckless, NOT merely negligent)
  • P relied on D’s conduct
  • P suffered harm (out of pocket damages only)
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13
Q

what is necessary to bring a Section 16(b) action?

A
  • corporation with securities traded on national securities exchange OR corporation with assets fo more than $10 million and more than 500 shareholders AND
  • corporate insider (director, officer, shareholder with more than 10% of any class of stock)
  • short swing profits: during any 6 motnh period, a corporate insider who both buys and sells the corporation’s stock is liable to the corporation for any profits made on those transactions
  • reporting: must report changes in stock ownership to the SEC
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14
Q

shareholder meeting - annual meetings

A
  • every corporation must hold an annual meeting to elect directors and conduct other shareholder business
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15
Q

shareholder meeting - special meetings

A
  • may be called to vote upon fundamental changes (e.g. dissolution, merger)
  • state laws typically specify who may call special meetings (e.g. board of directors, senior officer, % shareholders)
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16
Q

what are the notice requirements for shareholder meetings?

A
  • must be given notice between 60-10 days before the meeting
  • notice must include time, date, and location
  • special meeting only: must include the purpose of the meeting
  • insufficient notice + didn’t attend (didn’t waive)–> shareholder can challenge any actions taken at the meeting
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17
Q

Record Date: how do you determine which shareholders are eligible to vote at a shareholder meeting?

A
  • directors must fix a record date
  • must be no more than 70 days before the meeting
  • only shareholders who actually own shares on teh date are entitled to vote
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18
Q

what are the two alternatives to shareholder meetings?

A
  1. unanimous written consent to the action (usually only feasible for closely held corps)
  2. vote by proxy
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19
Q

requirements for voting via proxy

A

proxy - authorizes others to vote shares in accordance with the wishes of the shareholder
* in writing
* signed by the shareholder as of the record date
* sent to secretary of the corporation
* state that it authorizes another to vote the shareholder’s shares, and
* cannot be valid for more than 11 months, unless otherwise specified

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20
Q

issues that shareholders typically vote on

A
  • election of directors
  • mergers
  • share exchanges
  • amendments to teh articles of incorporation
  • sales of all or substantially all of its assets
  • dissolution
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21
Q

Quorum

A
  • for a** vote to be effective**, a quorum of the corporation’s shares must be represented at the meeting (in person or via proxy)
  • quorum = majority of the corporation’s outstanding shares reprented at the start of the meeting
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22
Q

Necessary vote

A
  • if a quorum is present, a shareholder vote is effective if the votes cast in favor of the proposal exceed the votes cast against the proposal (exclude abstentions)
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23
Q

cumulative voting

A
  • only applies if cumulative voting is permitted in teh articles
  • applies only to election of directors
  • shareholders are given a number of votes that is equal to the number of shares x the number of director positions being voted on
24
Q

shareholder inspection rights

A

can inspect corporation’s records in person or through an agent if:
* shareholder AND
* proper purpose (related to shareholder’s financial interest in the corporation, not to harass)

25
Q

what are the two types of shareholder litigation?

A
  1. direct lawsuits
  2. derivative lawsuits
26
Q

direct lawsuits

A
  • shareholder suing in shareholder’s own name and damages go directly to shareholder
  • share can sue directly if shareholder has been harmed directly (e.g. interference in voting rights or dividends, misinformation about important issues, and tort injury)
27
Q

derivative lawsuits

A
  • shareholder is suing on behalf of the corporation
  • harm to corporation (bad business decision, disloyalty, etc.)
  • claim must be made in the corporation’s name
  • any recovery belongs to the corporation
  • standing: 1) shareholder at time of harm, 2) hold shares throughout the litigation, and 3) fairly and adequately represent the interests of the corporation
  • generally shareholder must first demand that the board of directors bring the lawsuit before shareholder can bring suit (some jurisdictions: demand futility - demand not required if it would be futile)
  • attorney’s fees: if litigation produces “substantial benefit” –> P attorneys entitled to have their fees paid by the corporation
28
Q

In general, do shareholders owe fellow shareholder any duties?

A

No (except sometimes controlling shareholders)

29
Q

When do controlling shareholders owe a duty to mintory shareholders?

A
  1. sale of stock to an outsider/looter (if seller knew that was the buyer’s intent) –> fiduciary duty
  2. controlling shareholder transacts with the corporation (e.g. special distribution, business transactions) –> duty of loyalty
30
Q

What are the main tasks of the board of directors?

A
  • appoint officers
  • oversee officers
  • make high-level corporate decisions
31
Q

Who elects the board of directors?

A

shareholders

32
Q

how long does the board of directors serve?

A

limited term, usually 1 year

33
Q

When can a director be removed or replaced?

A
  • generally shareholders may remove directors without cause
  • exception: staggared board –> only removable for cause if the articles provide
34
Q

If there is a vacancy on the board or the board has increased - how are the new directors selected?

A
  • can be chosen by the shareholder at a special meeting OR
  • by the board of directors
35
Q

What notice is required for board meetings?

A
  • regular meetings - no notice required
  • special meetings - notice required
  • attendance waives notice unless director promptly objects at the meeting
36
Q

What are the voting requirements for board meetings?

A
  • quorum: majority of total number of directors UNLESS the bylaws specify a higher or lower number
  • affirmative vote: if a quorum is present, a resolution of the board will pass upon a majority vote of those present at the meeting
  • unanimous written consent - board may approve a proposal if agreed upon by unanimous written consent
37
Q

How can a director dissent from a board decision?

A

purpose = avoid liability for a board decision with which you disagree
* entering dissent in the meeting minutes
* file written dissent before the meeting is ajourned, or
* provide written dissent by certified or registered mail to the corporation’s secretary immediately following the ajournment of the meeting

38
Q

What duties do directors and officers owe to the corporation?

A

fiduciary duties of loyalty and care

39
Q

Duty of care

A

Rule: directors/officers have a duty to act with care that a person in a like position would reasonably believe appropriate under similar circumstances. special skills are expected to be used (e.g. lawyer, accountant).

Business Judgment Rule: in the absence of fraud, illegality, or self-dealing, courts will not disturb good faith business decision.
directors and officers are protected from legal liability under the business judgment rule

reliance defense: director/officer entitled to rely on the expertise of officers and other employees, outside experts, and committees of the board

40
Q

officers and director’s duty of loyalty to the corporation

A

Rule: duty of loyalty requires a driector/officer to act in a manner that they resonably believe is in the best interest of the corporation. Typically, a director/officer breaches this duty by placing his own interest before those of the corporation.

Self-Dealing Transactions - director, officer, or relative receives a substantial benefit directly from the corporation (e.g. salary)

safe harbor rule: self interested transaction may be upheld if it is:
* disclosed and ratified by majority of disinterested 1) directors or 2) shareholders
* fairness: if transaction was fair (substance and procedure), then okay.

Corporate Opportunity Doctrine - usurping or stealing corporate opportunity

competing with corporation

41
Q

indemnification definition

A

indemnification - practice of corporations paying the costs fo a director’s or officer’s defense in litigation, usually by purchasing insurance.

42
Q

required or mandatory indemnification

A

when director or officer successfully defends their case

43
Q

prohibited indemnification

A

director or officer found liable for receiving an improper benefit from the corporation or otherwise loses a lawsuit

44
Q

permissive indemnification

A

director or officer 1) acted in good faith with no intent to harm corporation OR 2) had no reasonable cause to believe the conduct was illegal.

45
Q

Who must approve fundamental changes to a corporation?

A

shareholders and directors

46
Q

What is the required process to approve a fundamental change to a corporation?

A
  • board must adopt a resolution proposing the change
  • notice must be sent to the shareholders of the special meeting
  • a majority of shares entitled to vote vote for it
47
Q

what are considered fundamental changes?

A
  • merger
  • consolidation
  • dissolution
48
Q

merger

A

combination of two or more corporations where one corporation survives and assumes the assets and liabilities of the other corporation.
type of fundamental change

49
Q

consolidation

A

combination in which neith of the two corporations survive and a new entity is created that assumes the assets and liabilities of both corporations.
type of fundamental change

50
Q

dissolution

A
  • voluntary dissolution by shareholders and directors OR
  • involuntary dissolution by
  • 1) creditors if corp not paying debt
  • 2) shareholders if a) corporate assets are being wasted, b) directors are acting fraudulently, or c) directors and shareholders are deadlocked
51
Q

dissenters’ rights or apprisal rights

A
  • shareholder does not want to participate in an authorized: merger, asset sale, share exchange, or amendment of the articles
  • to invoke must: (1) send written notice to corp prior to vote of intent to dissent, (2) at meeting abstain or vote not, and (3) make a prompt written demand for FMV after action has been approved.
  • if shareholder and corp disagree as to FMV, a court can appoint an expert appraiser
52
Q

close corporations (i.e. closely held corporations)

A
  • corporation with few shareholders (~<100)
  • relaxation of rigid rules for corporations
  • DIFFERENCE: can form voting agreements
  • DIFFERENCE: default rule prohibiting preemptive rights may be relaxed
53
Q

S corporatin

A
  • corporation for state corporate law purposes - gets special tax treatment
  • only taxed once, like a partnership - NOT taxed at entity level - allows pass through taxation
  • limited in the number of shareholders it may have
54
Q

Limited Liability Company (LLC)

A
  • combines the limited liability of corporations with the tax treatment fo a partnership
  • no limitations on number of shareholders, residency requirements, or natural person requirements
  • LLC files articles of organization and an operating agreement with the state
  • onwers called members, not shareholders
  • LLC presumed to be managed by all of its members
  • otherwise treated the same as a corporation
55
Q

Pericing the Corporate Veil

A
  • Piercing the corporate veil describes the removal of the shield that protects a shareholder from full personal liability for corporate conduct.
  • In most jurisdictions, no bright-line rules exists for when a court will pierce the corporate veil, but courts generally look to the totality of the circumstances to see if the corporation is being used as a facade for a dominant shareholder’s personal dealings (i.e. whther the corproation is an alter ego or mere instrumentality of the shareholder). factors:
  • undercapitalization of corp at time of formation
  • disregard of corporate formalities
  • intermingling of corporate and personal assets
  • use of corporate assets for personal purposes
  • self-dealing with the corporation
  • siphoning of corporate funds or stripping of corporate assets
  • use of corporate form to avoid existing statutory requirements or other legal obligations
  • wrongful, misleading, or fraudulent dealings with a corporate creditor

Corporations (1 decks)

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