MEE - Corporations Flashcards
Formation formalities
Name of corporation
Max number of shares
Names and addresses of incorporators
Registered office & agent
Articles of Incorporation vs By laws
Articles of incorporation prevail in the event of inconsistency
Corp liability - pre-incorporation contracts
Corp liable if they expressly or implicitly endorse the contract. Can be found to endorse contract even if have not reviewed the whole contract. Cannot pick and choose which aspect of contract they endorse
Promoter liability - pre incorporation contract
Promoter remains liable even if the corp adopts the contract. Only way to rid liability is to NOVATE the contract
Foreign corporations
Out of state corporations; can be sued but cannot sue until they incorporate in the state
Ultra vires acts
Articles of incorporation may state purpose, acts outside the purpose are ultra vires. 3 options: 1/ sue to injunct ultra vires acts 2/ sue directors involved incl for resulting damages 3/ the state may bring an action to dissolve
De facto corporation
A corporation which is not incorporated owing to some lack of formality., but It could’ve been incorporate and good faith attempts were made to incorporate it. Where a person within the corp KNEW the corp was not incorporated, they will be jointly and severally liable (and vice versa if the person DID NOT KNOW -> no liability)
Corporation by estoppel
Person who treats corp like a corp cannot deny contractual liability if later found out corp not incorporated - only applies for contract liability
Authorised shares
The maximum number of shares that a company may issue
Issued/outstanding shares vs reacquired shares
Issued/outstanding are sold to investors, Reacquired are those that are reacquired and can be sold again
Classes of shares
Corp may classify shares, to do this the articles of incorporation MUST: classify shares, state which rights/ limitations attach to them
Pre incorporation subscriptions
If you subscribe in pre incorporation round, you cannot revoke offer for 6 months unless (i) subscription agreement says otherwise, (ii) subscribers agree
Consideration for shares
Can be issued for any value - tangible or intangible incl for services rendered by employees
Par stock
Par stock cannot be sold for less than par, directors liable for difference if they authorised, buyer always liable, on-buyer liable only if they knew + acted in bad faith
Pre emptive rights to percentage
Holders of pre emptive rights can accept/reject but cannot block as this would be a restriction on alienation
Pre emptive rights to percentage (do not apply to …)
1/ Shares issued for consideration other than cash (i.e. employees for services)
2/ Shares issued 6 months within incorporation
3/ Shares with no voting rights (just dividends)
Pre emptive rights to percentage (third parties)
Third parties who buy in breach of pre emptive rights will be liable if they had notice of the breach
Directors appointment / removal
Elected by shareholders at annual meeting, can be removed by shareholders with or without cause
Directors meetings (regular)
Don’t need to give them notice
Directors meetings (special)
Need to give them 2 days’ notice
Quorum of directors
Majority of directors is quorum and majority of quorum is the voting majority
Board action without meeting
Board acts as a collective group, in the absence of a meeting, the board can take action if there is written and unanimous agreement to it
Directors’s delegation of authority
Can delegate authority for the day to day running to other officers - can create committees chaired by one or more director
Directors’ duty of care
Burden on plaintiff. Director owes fiduciary duty of care. In determining whether it has been breached, court will apply business judgment rule: 1/ acted in good faith 2/ with due care of a reasonably prudent person 3/ believed action would be in interests of co
Director liability exclusion
Articles cannot exclude liability for 1/ intentional wrongs, 2/ approving unlawful distributions 3/ taking funds from co. In effect, can only exclude liability for negligence.
No indemnification for directors
Where directors are held to be liable to the corporation, they will receive no indemnification
Mandatory indemnification for directors
Director will receive mandatory indemnification covering reasonably attorney fees if the suit, whether the action is dismissed don merits or otherwise
Permissive indemnification for directors
Where the director is found guilty of the conduct but acted in good faith and believed it was for the benefit of the corp
Duty of loyalty
The burden is on the director. Three main things:
1/ conflict of interest (and safe harbour defence)
2/ corporate opportunity 3/ duty to disclose
Conflict of interest (safe harbour defence)
Where director has an interest in transaction to which the corp is a party such that it cannot be expected that he would act independently. Safe harbour defence applies where:
1/ transaction ratified by disinterested board or shareholders; or
2/ the transaction is fair value given the circumstances existing at the time
Closed corporations - duties to shareholders
Often no distinction between shareholders and owners - so duty directly owed to shareholders
Closed corporations - oppression of minority
Comes in the form of: exclusion from management, starving off dividends etc
Closed corporations - piercing the corporate veil
Directors/shareholders typically not personally liable bc of separate personhood. In closed corporations, corporate veil can be pierced:
1/ Using corp as instrumentality of one person rather than group/corp decision making
2/ Using corp as instrumentality of fraud/illegality
3/ Where the corp is under capitalised at the outset
Shareholder suits - direct
Rare, for duties owed directly to shareholders, no notice requirements, usually for lack of payment for dividends
Shareholder suits - derivative
Action on behalf of co where directors not willing to bring suit, requires 90 days notice unless 1/ previously asked and rejected 2/ period would cause irreparable harm to the co. *Any damages received go to corp.
Shareholder suits - derivative (independent report)
The corp can argue that the derivative suit has no action via an independent investigative report, upon which burden shifts back to plaintiff to prove breach
Annual shareholder meetings
Must be held
Notice of shareholders’ meeting
More than 10 days, less than 60 days
Special shareholders’ meeting
Can be called by 10% shareholders, president, board of directors or any one per bylaws
Shareholders’ votes
1 share is 1 votes, unless articles say otherwise; cumulative voting allowed for election of directors; modern trend to count majority of who voted not majority of all shareholders
Shareholder proxies
Revocable proxies last for 11 months or until voted by shareholder; irrevocable proxies cannot be revoked, must state they’re irrevocable in writing and coupled by interest
Shareholders’ inspection rights
Can inspect on 5 days’ notice and for “proper purpose” which is everything associated with their position as shareholder. Can inspect without showing “proper purpose”:
1/ articles / by laws
2/ board minutes / annual reports
3/ corp comms to shareholders
4/ resolutions re share classifications
Distributions
Dividends are discretionary for the board; shareholders’ have no right to demand a dividend even if they have a right to a dividend; shareholders may have claim if funds applied for directors salaries (in bad faith etc)
Distributions - Wrongful
Cannot make distribution if co is nearing insolvency (unless they relied in good faith on data); shareholders will be liable if they knowingly accepted wrongful distributions.
Types of “fundamental corporate change”
1/ Amendment of articles
2/ Merger *
3/ Selling off business assets *
4/ Changing business *
5/ Dissolving
Fundamental corporate change - Procedure
Approved by majority of directors then put to shareholders, must be proved by majority of shareholders, and where change includes dissenter rights, notice must state so
Fundamental corporate change - dissenters’ procedure
Where a fundamental corporate change evokes dissenters’ rights, the notice to shareholders must state so, dissenter must notify of dissent before the vote, dissenters must be bought out. Dispute as to value? dissenter report in 30 days, if no agreement company files suit in 60 days.
Fundamental corporate change - Mergers
No need for approval where absorbing corporation would not change (no change in shareholding, articles). Also, no need for approval where target is 90% owned by absorbing entity.
Statutory dissolution
Can dissolve corporation if it has failed to adhere to statutory formalities (payment of fees, eg)
Judicial dissolution
Can be sought by attorney general where corp used to perpetuate a fraud; shareholders where there is a deadlock, where the co has abandoned business, where corp assets have been misused (i.e. OPPRESSION)
