Other MEE Rules Flashcards
When and how is a corporation formed?
Generally, a corporation is formed when the Secretary of State files the articles and accepts the fee (unless the articles specify a delayed effective date).
The articles of incorporation MUST set forth the following:
(1) The name of the corporation;
(2) The maximum number of shares of each class of stock that the corporation is authorized to issue;
(3) The names and addresses of:
(a) The first board of directors;
(b) The incorporators executing the articles of incorporation*; AND
(c) The initial registered agent**;
(4) The purpose of the corporation (generally “to engage in any lawful activity”); AND
(5) The duration of the corporation (most are perpetual).
*An incorporator is the person in charge of setting up a corporation and registering it with the state. They’re responsible for filing the paperwork and signing the articles of incorporation. A business is not fully incorporated and legally registered without an incorporator. The incorporators of a company are not necessarily the same people who will own it. The owners may hire an incorporator—for example, an attorney—just for the purpose of incorporating the business. https://www.thebalancesmb.com/what-is-an-incorporator-or-organizer-of-a-business-398297
**A registered agent is a person who will receive legal and other documents on behalf of your business, such as subpoenas, regulatory and tax notices, and correspondence. . . . Your registered agent’s name and address are publicly available, so outsiders know who to deliver papers to. And you can feel confident that there’s just one contact point for any legal notices your business might receive. https://www.legalzoom.com/articles/why-do-i-need-a-registered-agent
How may the articles of incorporation be amended?
The articles of incorporation may be amended if there is a majority vote from the directors AND shareholders. However, minor amendments may be made by the board of directors without shareholder approval.
If there is a conflict between the bylaws and articles of incorporation, which governs?
If there is a conflict between the bylaws and articles of incorporation, the articles of incorporation govern.
Why are bylaws typically not included in a corporation’s articles of incorporation?
Bylaws are easier to amend. While the articles of incorporation may only be amended by the shareholders, the bylaws may be amended or repealed by either the shareholders or the board of directors (UNLESS the shareholders expressly specify otherwise).
What is an Ultra Vires Act? What can be done about it, and by whom? (Themis only)
An Ultra Vires Act occurs when a corporation has a narrow purpose and acts outside the scope of that purpose. Several different entities may take action:
(a) A shareholder can file a suit to enjoin the action or take action against the officer, director, or employee who engaged in the act.
(b) The corporation can take action against ultra vires directors or officers.
(c) The state can initiate proceedings to enjoin such actions.
If the act exceeded the corporation’s stated purpose, it will be held unenforceable.
Under what circumstances may an unsuccessful but good-faith attempt to incorporate give rise to corporate protections when the improperly formed corporation enters into obligations?
1) De Facto/Defective Corporation: The corporation’s organizers made a good-faith effort to comply with the incorporation process, and they ran the business believing it was incorporated (without actual knowledge of the defect in its corporate status).
2) Corporation by Estoppel: A third party entered into a contract with the corporation as though it was properly incorporated; the third party is estopped from asserting that the corporation was not formed appropriately.
3) General Partnership: When a corporation has not been created, the entity may be treated as a general partnership. A partnership is an association of two or more persons to carry on a for-profit business as co-owners. In a general partnership, each partner is jointly and severally liable for all partnership obligations.
When is a corporation bound by pre-incorporation contracts that were entered into by a promoter? (3.7%)
A corporation is NOT bound by any pre-incorporation contracts that were entered into by promoters UNLESS the corporation adopts such contracts. An adoption can be express or implied from the actions of the corporation or its agents (e.g., accepting the benefits of a known pre-incorporation contract).
Preemptive rights (1.9%)
a) A preemptive right is a right of a current shareholder to purchase additional shares in the corporation before outsiders are permitted to do so in order to maintain their percentage of ownership in the corporation.
b) In most states, a corporation must “opt in” to create preemptive rights by expressly including such rights in the corporation’s articles of incorporation. However, in some states, preemptive rights are presumed to exist unless the corporation “opts out” by expressly barring such rights in the corporation’s articles of incorporation.
c) Unless otherwise set forth in the articles, preemptive rights do NOT exist for:
(1) Preferred shares that CANNOT be converted to common stock;
(2) Shares sold for a consideration other than cash; OR
(3) Shares issued by majority shareholder vote to directors, officers, or employees.
Distribution rights (3.7%)
a) Unless otherwise set forth in the articles of incorporation, a shareholder does NOT have any right to receive distributions (whether in the form of dividends* or otherwise) from the corporation. Dividends and distributions are generally paid to shareholders at the full discretion of the board of directors.
b) However, if the board of directors refuses to issue distributions in bad faith, but not necessarily in bad judgment, the shareholders may be able to compel distribution.
*IRS: Dividends are distributions of property a corporation may pay you if you own stock in that corporation. Corporations pay most dividends in cash. However, they may also pay them as stock of another corporation or as any other property.
Consideration for shares (1.9%)
a) The board of directors may authorize issuance of shares for consideration of ANY tangible or intangible property or benefit to the corporation (e.g., cash, promissory notes, services performed, contracts for services performed, etc.).
b) Absent fraud or bad faith, the judgment of the board of directors as to the consideration received for the shares issues is conclusive.
Shareholders’ voting rights (3.7%)
Shareholders have the right to vote to select the board of directors and to approve fundamental corporate changes (e.g., merger, sale of corporation).
a) Non-Voting Shares. The articles of incorporation may provide that holders of certain types of shares cannot vote unless specific conditions are satisfied. However, such shareholders are still entitled to receive notice even though their shares have non- voting status.
b) Weight of Vote. Unless otherwise provided by law or the articles of incorporation, all shareholders’ votes are counted equally, regardless of class.
c) Record Date. A shareholder is only entitled to vote if she acquired voting shares before a designated record date. Generally, the record date may be designated in the bylaws no more than 70 days prior to the shareholder meeting.
d) Cumulative Voting. Shareholders elect directors either directly (each share equals one vote) or cumulatively. Cumulative voting is usually a more favorable method to represent the interests of minority shareholders. In cumulative voting, voters cast as many votes as there are seats, but voters are not limited to giving only one vote to a candidate. Instead, they can put multiple votes on one or more candidates.
e) Shareholder Agreements. Shareholders may enter into an agreement to vote their shares together.
Meetings of board of directors (1.9%)
a) Quorum. For the board of directors to validly take action or vote, a quorum of directors must be present at the meeting. Unless otherwise set forth in the articles of incorporation, a quorum exists when at least a majority of the directors are present. Directors are considered present so long as all of the directors participating can simultaneously hear each other (e.g., conference calls).
b) Informal Action. Informal action by the board may be taken without a quorum present so long as the board has unanimously consented to the action in writing.
c) Notice. It is presumed that directors have notice of regular meetings. However, for special meetings, directors must be given 2 days’ notice, which includes information about the time, location, and date of the meeting. However, such notice is NOT required to provide the purpose of the special meeting.
A director who did not receive proper notice can object. But, if the director attends the meeting and fails to object to lack of notice, the objection is waived.
Authority of directors and officers (1.9%)
a) Board of Directors. Subject to any limitation imposed by law or the articles of incorporation, the board of directors has full control over the affairs of the corporation.
b) Officers. The board of directors generally delegates day-to-day management of the corporation’s business to officers elected by the board (CEO, CFO, president, secretary, treasurer, etc.). They act as agents of the corporation. An officer can act with actual express authority, actual implied authority, and apparent authority.
The board may remove officers at any time with or without cause. However, such removal may result in a breach of contract action if the board is violating an employment agreement.
Exam Tip 6: Can raise Agency issues regarding whether the officer (as an agent) had authority to bind the corporation (the principal) to a contract with a third party
Valuation of stock
Board of directors must determine whether the value paid for the stock is adequate.
Par Value Stock—corporation assigns a minimum value to its stock.
If sold for less than the par value, the board is liable
Shareholder may also be liable if had knowledge of par value.
Dissolution and winding up
- A corporation may voluntarily terminate its status.
- Winding Up—corporation exists for the limited purpose of winding up its affairs and liquidating its business
- Order of distribution:
1) Creditors of the corporation
2) Shareholders of stock with preferences in liquidation
3) Other remaining shareholders of stock
