MEE - Corporations Flashcards
*What is promoter liability, and how can it be avoided?
A promotor is a person who procures commitments for capital and instrumentalities on behalf of the corporation to be formed. Generally, promoters are personally liable on the contracts they enter into on behalf of the corporation to be formed. This liability continues after the corporation is formed and even if the corporation also becomes liable on the contract by adopting it.
However, A promotor will not be liable on a reincorporation contract if the agreement between the parties expressly indicates that the promoter will not be bound.
In otherwords, corporations are not liable on contracts entered into by a promoter. A corporation can become liable if it adopts the contract expressly or impliedly.
*What voting rights to shareholders have?
It should be noted that only shareholders of record on the record date may vote at a shareholders’ meeting. They do not have to vote in person; they may give another a written and signed proxy giving the other the right to vote the shares. A quorum must be present for a vote to be case (at least a majority of shares entitled to vote are present)
Proxies are revocable but are irrevocable if it is coupled with an interest and clearly states that it is irrevocable. Individuals who show up to vote in person effectively revoke any proxy extended.
Unless articles or bylaws provide otherwise, Board of Director elections are elected by plurality of votes. Cumulative voting may be allowed in the articles where each share can cast as many votes as there are Board seats up for voting.
Shareholders do not have a right to make decisions regarding operation of the corporation. Shareholders can protect their interests by electing candidates to the board, and they may vote on fundamental changes.
Shareholders do not have any preemptive rights to buy a sufficient number of newly issued shares in order to maintain current voting strength. But where articles do provide for such right, they generally extend only to shares that are newly authorized and issued for cash; they do not extend to shares issued as part of the employee’s or officer’s compensation or in exchange for options issued as part of an employee’s compensation.
**When may a corporation restrict the transfer of shares?
A corp. may restrict the transfer of shares for any reasonable purpose. For example, a restriction can require a shareholder to offer the shares to the corporation first or require the corporation or other persons to purchase offered shares. A prohibition on the transfer to a designated person or class of persons is also permissible as long as the prohibition is not manifestly unreasonable.
A corporation must record transfers of shares in its corporate records. A share transfer restriction is unenforceable against a third party who purchases the restricted shares unless existence off the restriction is conspicuously noted on the share certificates or the purchaser otherwise knows of the restriction.
*What rights to shareholders possess other than appraisal rights?
Shareholders can vote to remove and elect directors, amend or repeal bylaws, and approve fundamental changes to the corporation such as mergers sales of assets outside of the ordinary business and dissolution.
Shareholders generally have a right to inspect their corporations books and records for a proper purpose. A purpose is proper if reasonably related to a person’s interest as a shareholder. 5 days’ written notice must be provided to the corp for inspection. There are certain records that shareholders may inspect without a proper purpose: Articles and bylaws, Annual reports and meetings minutes, BoD resolutions on share classifications, Corporate communications to shareholders.
*What voting rights does the chief executive officer have?
The president may only vote with outstanding shares. Shares that were issued and outstanding, but that have been repurchased are not outstanding.
*What authority does the Chief Executive Officer have?
As a general rule, the authority of a corporate president to enter into transactions on behalf of his corporation is governed by the principles of agency. Authority may be actual or apparent, or an agent’s previously unauthorized act may be later ratified by the corporation if it is approved by the board of directors.
As a general rule, unless specifically excluded by the corporation, a president will have the power to enter into ordinary contracts involving the day-to-day operation of the corporation. A corporate president can have power to enter into extraordinary transactions if authorized by the board of directors or bylaws. However, the board cannot give the president power that the board itself does not have.
*Where may rules for shareholder voting be found?
The vote required for approval may be set in the articles of incorporation or the bylaws, but when the two conflict, the articles of incorporation control.
*What powers does a shareholder have if they disagree with a fundamental change to the corporation?
Shareholders who dissent from a fundamental corporate change can force the corporation to purchase their shares at a fair price through appraisal.
Shareholders must (1) file an objection to the transfer/merger before or a the shareholder’s meeting, (2) not vote in favor of the change, (3) send the corporation a written demand for the fair value of shares, and (4) deposit shares with corporation as directed. If the corporation and shareholders cannot agree on fair value, the corporation must file action requesting court to determine fair value.
*How may a corporation shield directors’ personal liability for damages to shareholders or corporation?
A corporations’s articles of incorporation may limit or eliminate director’s personal liability for money damages to the shareholders or corporation for actions taken, except to the extent that the director received a benefit to which he was not entitled, intentionally inflicted harm on the corporation or its shareholders, approved unlawful distributions, or intentionally committed a crime.
*What is the difference between a direct action and a derivative action by a shareholder?
In a direct action, the shareholder is vindicating their own rights and does not need to make a demand on the board.
In a derivative action, a shareholder seeks to vindicate wrongs done to the corporation. Before bringing a derivative action, a shareholder must first make a demand on the board of directors to act on the corporation’s behalf, although this requirement is dispensed with in many states if the request would be futile.
Shareholders may dismiss a shareholder derivative suit if a majority of disinterested directors find in good faith and after reasonable inquiry that the suit was not in the corporations best interest.
*What is the Business Judgment Rule?
Generally, directors are not insurers of a corporation’s success. They cannot be held liable for business decisions if they act in good faith and like a reasonable person in a like position. To meet the fiduciary standard of care directors must comply with the BJR.
Courts will not second Guess a poor or erroneous decision made by a director or officer if the decision was made: (1) in good faith, (2) With the care that a person in a like position would reasonably believe appropriate under the similar circumstances, and (3) In a manner the director reasonably believed to be in the best interests of the corporation.
Person challenging director action has burden of proving standard is not met.
*Upon what information may a director rely when making corporate decisions?
In discharging duties, directors can rely on reports from (1) officers whom the director reasonably believes to be reliable and competent, and (2) outsiders as to matters director reasonably believes to be within outsider’s professional competence.
What constitutes a valid board action?
For an action to constitue valid board action, it must be approved by a majority of a quorum at a properly convened meeting. The regular directors’ meeting does not require notice, but a special directors’ meeting requires at least two days’ notice to be properly convened. The notice must state the time and place of the meeting. Unlike a notice for a special shareholders’ meeting, a notice for a special directors’ meeting need not state a purpose. The meeting may be held anywhere within or outside the state. A director may waive improper notice, either by signing a notice of waiver and filing it with the minutes of the meeting, or simply by attending the meeting and voting. Absent special provisions in the articles or bylaws, a quorum will consist of a majority of the directors. A director will be considered present at a meeting if the director attends in person or through a remote communications device that allows each participant to simultaneously hear the other participants.
*What powers do the Board possess as they related to fundamental corporate changes?
The board has the power to study business options and could delegate that power to its agent, The board does not have the power to authorize fundamental corporate changes without shareholder approval. The sale of all corporate assets outside the scope of ordinary business would be a fundamental change that would require both board approval and shareholder approval.
What powers does the board possess in regards to its compensation and the compensation of employees
directors have the power to set their own compensation as well as the compensation for employees.
