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64 Cards in this Set
- Front
- Back
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Creation of a DE JURE corporation
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when corporation documents are filed with sec. of state.
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de facto corporation
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1. relevant incorporation statute
2. parties made a good faith, colorable attempt to comply with it 3. and some exercise of corporate privileges a corporation for all purposes and has corporate status as against all persons except the state |
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Corporation by estoppel
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persons who treat an enterprise as a corporation and deal with it on that basis will be estopped to deny its corporate status.
-applies only against particular person being estopped. |
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Liability of Promoter
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Promoter is a person who acts on behalf of a corporation before it is formed.
When a promoter enters into K he is liable on the K unless the other party knew that there was no corporation. If the corp ADOPTS the K, then promoter and corp are jointly and severally liable. If there is a novation--agreement of the promoter, corp and other contracting party that the corp will replace the promoter on the contract, then promoter is no longer liable. |
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Adoption of promoter K
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Adoption of a pre-inc K by a corp requires intent by the corp to become a party to the K. This can be EXPRESS i.e. BofD meet and formally adopt the K or IMPLIED if the corp accepts the benefits under teh preincorp contract i.e. moves in, begins using the space, i.e. impliedly adopts the lease.
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Promoter Secret Profit Rule
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During the pre-incorporation period, the promoter has a fiduciary duty[full disclosure and fair dealing as to all matter pertaining to the corporation] to the corporation
Promoter cannot make a secret profit on his dealings. Profit depends on whether the property was required before or after becoming a promoter. Before--no secret profit After--difference between price paid by promoter and price paid by corp. --no liability if promoter made full disclosure. |
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Consideration for issuance of stock
-can it be services |
Any tangible or intangible property or benefit to the corporation:
1. Cash 2. PromNotes 3. Release of a claim 4. contract for future services 5. past services For noncash consideration, the directors may determine the value of the consideration. To collect the value of these unperformed services, the shareholders need to bring a derivative suit. |
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Removal
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Directors: can be removed with or without cause at any time by a majority of SH votes UNLESS charter states otherwise.
Officers may be removed at will by DIRECTORS |
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Director liability for business decisions
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Under Duty of Care
Business Judgment Rule: director or officer must discharge her duties in what she believes to be: 1. in good faith 2. in the best interests of the corporation and 3. with the care of a reasonably prudent person under the circumstances. ------ Where the director does not have sufficient facts to make a judgment, he must make reasonable efforts to inform himself. --doing nothing can breach duty of loyalty where the failure to act proximately causes loss to the corporation. |
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Can directors conduct transactions within the corporation?
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Falls under DUTY OF LOYALTY
INterest can be indirect as a result of other circumstances. Yes an interested director can protects transactions from being challenged if the transaction is EITHER: 1. fair and reasonable to the corporation 2 disclosure of the conflict is made and the transaction is approved by a majority of the disinterested Board 3. disclosure of the conflict is made and the transaction is approved by disinterested shareholders. |
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Usurpation of corporate opportunity
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Falls under a duty of loyalty
Not honesty alone, but the punctilio of an honor the most sensitive occurs when a director fails to offer a business opportunity--within the line of business or expectancy of the corporation--to a corporation prior to pursuing the opportunity for himself. To avoid usurpation of corporate opportunity the corporation must reject the opportunity by either: 1. disinterested majority of BofD or shareholders or 2. corporation did not possess the means to take advantage of the opportunity court would impose a constructive trust. |
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Shareholder Oppression
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in closely held corporations, courts entertain Shareholder oppression actions.
when actions taken by a controlling party or group defeat the reasonable expectations of the parties when they formed the entity. These actions constitute a breach of fiduciary duty by controlling parties. Typically these involve the exclusion of one of the original SHs from the expected benefits e.g. terminating a particular shareholder's employment while the others continue to draw salaries. |
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Disclaimer in corporate charter stating that directors are not personally liable for breach of duty
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A disclaimer in the charter will only protect the directors for breaches o duty of care and only if the conduct was in good faith and the breach was unintentional.
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Violation of Fiduciary Dutyi.e. loyalty, care
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the transaction void. SOL is 1 year. 3 year repose)
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When may corp. NOT pay a dividend?ie. unlawful distribution
Liability |
It is unlawful for a corporation to make a distribution to SHs if the distribution would render the corp INSOLVENT.
Distributions include: 1. dividends and 2. payment smade to acquire a shareholder's stock. If the distribution is unlawful, the directors who assent to the distribution are jointly and severally liable for the amount of the distribution in excess of the limitations. insolvent can be either: 1. cash flow insolvency-->not being able to pay debts as they come due OR 2. balance sheet insolvency--liabilities exceed assets |
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Loans to directors or officers
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Directors: not permitted without approval by disinterested Bod, disinterested SHs or fair and reasonable to the corporation
Officers: must be approved by disinterested SHs or BoD after Bod determines that it benefits the corporation. |
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when can Shs be held liable--PCV
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Generally Shs are not liable for the debts of the corporation. TN will sometimes pierce the corporate veil.
**also if persons acting on behalf of the corporation, knowing that there has been no corporation will be liable personally for debts incurred. 1. commingling of funds by using corporate funds to pay shareholder personal expenses 2. lack of adherence to corporate formalities 3. initial undercapitalization 4. absolute domination of corporate affairs by a shareholder. 5. fraud or evasion of statutory provisions. ------ 3 prong test: 1. SHs have completely controlled and dominated the affairs of a corpoation so that it has no mind of its own 2. Shs have exercised control in a way that is wrongful or FRAUDULENT -siphoning funds -undercapitalization AT TIME OF FORMATION (usually not enough by itself -nonpayment of dividends -absence of corporate records -ignoring corp formalities--alter ego -comingling 3. SHs wrongful exercise of control has caused harm to creditors ---- Alter Ego theory: Where the corporation ignores corporate formalities such that it may be considered the "alter ego" of the shareholders or another corporation, the corporate veil may be pierced. These situations may arise where shareholders treat corporate assets as their own, fail to observe corporate formalities, etc., and some basic injustice results. -comingling of funds But note: Sloppy administration alone may not be enough to pierce the corporate veil. Avoidance of Existing Obligations, Fraud, or Evasion of Statutory Provisions: The corporate veil may be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations. But the mere fact that an individual chooses to adopt the corporate form of business to avoid future personal liability is not itself a reason to pierce the corporate veil. |
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Derivative suit
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a shareholder derivative suit is an action brought by a shareholder to enforce corporaton's cause of action.
1. Before bringing the action, the SH must first make a WRITTEN DEMAND to the BoD to bring the suit, BUT this is not required if the demand would be FUTILE. 2. SH must have owned shares at the time the claim arose OR receive shares by operation of law from someone who did. i.e.. inheritance 3. SH must ADEQUATELY represent the interests of the corporation. |
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Special Litigation Committee
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A response to a Sh derivative action, BoD can appoint a special litigation committee to determine whether the suit should be dismissed in the best interests of the corporation as an expression of the business judgment.
Committe must be : 1. independent 2. act in good faith 3. give a "reasoned and principled" basis for its recommendations |
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Approval required for merger?
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A merger requires approval by the BoD (majority vote) and SHs by a majority of those entitled to vote. Articles of merger must be filed with the sec. of state.
IF the merger is a short form merger--a merger of a 90% owned subsidiary corp into a parent corp then SH approval is NOT required. |
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Effect of merger
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surviving entity succeeds to all rights and liabilities of the constituent entities.
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Merger--dissenting Shs right of appraisal
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A Sh who does not want a merger to happen can insure that he is not a Sh in the new corporation if: he files a written notice of dissent prior to the vote and he should not vote. If the merger is then approved, the SH can recover the value of his shares.
In order to recover the value of his shares, the dissenting SH must, following approval of the merger, 1. demand payment of the value of his shares 2. deposit those shares with the corporation 3. corporation then is required to declare what it considers to be the value of the shares to be. If the Sh disagrees, then, absent an agreement, he can file suit for judicial appraisal of his shares. |
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Requirements for sale of corps assets outside the regular course of business
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approval of board of directors AND the shareholders.
Must be a quorum to take any action. BoD quorum: more than 50% of directors SHs quorum: 50% of the ooutstanding shares must be present but approval need only be 50% plus 1 of shares ACTUALLY voting. |
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SH petition to dissolve corporation
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SH may petition court for an involuntary dissolution of the corporation if:
1. Director deadlock plus irreparable injury to corp OR 2. SH deadlock plus failure to elect directors for 2 years OR 3. Directors or those in control of corp are acting illegally, oppressively or fraudulently -->AG can also disolve on this ground OR 4. or the corp's assets are being wasted or misapplied If the corporation is dissolved, then its assets will be distributed. A court could appoint a receiver to take control of the assets of the corporation. |
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Dissolution by Sec. of state
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if a corp fails to file annual report within 2 months of its due date, sec of state will notify the corp that if it does not file and report and pay filing fees within 2 months, it will be administratively dissolved.
-not a ground for liability of directors. |
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how does an unknown creditor bring a claim against a dissolved corporation
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under the TN Biz Corp Act, SHs of a corp winding up must give actual notice to known creditors who then have 4 months to file any disputes or claims.
Additionaly, the Shs of the corporation winding up must make publication to holders of unknown claims who then have 2 years to file a claim or it will be barred. A claim may be made to the extent of its undistributed assets or, if the assets have been distributed, against the SHs. If the assets have been distributed to the shareholders, then each shareholder is liable for its pro rata share, not to exceed the total amount of assets distributed to the Sh by the corporation. |
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Requirements for a Special SHs meeting consequences of failure to meet reqs.
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Demand that corporate secretary call a special meting can be made by:
1. BoD 2. person designated in charter e.g. president 3. 10% of voting stock AND NOTICE Notice of a special (or a regular/annual meeting) must: 1. state the purpose time and place (regular meeting need state only time and place) be given 10 days in advance of the meeting, but no more than 2 months in advance. If proper notice is not given then the action taken at the meeting is void UNLESS the SHs not receiving notice waive the defect by attending the meeting (without objecting at the beginning of the meetin) |
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Requirements for special diectors meeting
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chairman of the BoD, president, or any 2 directors upon two days notice.
notice must state time, place and purpose for the special meeting no notice required for a regular meeting. |
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Corporate Charter
Mandatory Info |
name, shares (# authorized + classes/ rts), address of registered office/ agent, name/ address of ea incorporator, address of initial principal office, statement that corp is for-profit
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Ultra Vires
*need not state any purpose; presumed corp can carry on any lawful purpose UNLESS a more limited purpose indicated* |
Consequnces if action outside limited purpose:
SH can sue to enjoin AG of TN can sue to dissolve if action loses $, Corp can sue directors who allowed |
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By-Laws (not required)
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adopted by incorporators or directors and can be amended by directors or SHs (but SH-adopted control if conflict)
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Promoter
generally remains liable on pre-incorporation Ks until novation |
Secret Profit Rule: cannot make a profit on his dealings with the corp (full disclosure may absolve)
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Foreign Corps must get a cert of authority from SoS
*but K validity not impaired* |
Consequences for Transacting Business in TN without Cert:
can't prosecute a lawsuit in TN courts, subject to dollar penalty (treble fees should have paid) |
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Issuance of Stock
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pre-incorporation subscription is irrevocable for 6 mos
post-incorporation subscription is freely revocable |
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"Watered Stock"
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issuing par stock for less than par value
Corp can recover from its Directors AND from purchaser |
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Preemptive Right
*must be provided for in charter* |
rt of an existing SH to maintain his percentage of ownership by buying stock whenever there is a new issuance of stock FOR CASH
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DIRECTORS
*minimum of 1* |
A majority of all directors must be present to business (quorum), then a majority vote of those present to pass a resolution.
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DIRECTORS & OFFICERS
DUTY OF CARE *can rely on corp's accountants, attorneys, etc.* |
must discharge duties as believes in good faith to be in the best interests of teh corp and with teh care that a prudent person would use in similar circumstances (Business Judgment Rule applies)
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DIRECTORS
DUTY OF LOYALTY |
1. Interested Transactions (safe harbor rule)
2. Competing Ventures 3. Corporate Opp (treated as holding in constructive trust) |
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Safe Harbor (applies to Interested Director Transactions)
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No liability IF:
1. fair and reasonable to corp OR 2. disclosure to/ approval by disinterested board majority 3. disclosure to/ approval by disinterested SHs |
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OFFICERS
agents of corp (actual, apparent or inherent authority) |
only a Secretary is REQUIRED
officers are freely selectable and removable by directors |
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Indemnity of Officers/ Directors when sued in capacity as such
mandatory only if successful in defending suit |
Permissive when acted in good faith belief in best interest of corp: determined by disinterested directors or committee of directors, independent legal counsel or majority of SHs
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SHAREHOLDERS
*not liable for debt of corp |
Exceptions:
1. Watered Stock 2. PCV--alter ego (commingling) or undercapitalization (+ other factors) |
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Shareholder Agreements
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Can control management of corp though generally BoD does.
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Shareholder Derivative Suits (recovery goes to corp)
suing to enfore the Corp's COA rather than an individual COA |
Requirements:
stock ownership adequate rep written demand on directors |
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Voting Trusts and Agreements by SH
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allowed and not required to give corp notice
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SH annual meeting required by statute
Notice: time, place *failure to give ntoice to all SHs will VOID any action taken!* |
special meetings can be called by SH having 10% voting stock or BoD
Notice: time, place and purpose |
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SH Voting
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Quorum must be represented at meeting (determiend by # of shares represented). Majority of those shares actually voting needed to bind corp.
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Stock Transfer Restrictions will be upheld if reasonable
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can't be an absolute retraint on alienation/ undue burden
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RTS of SH to inspect books and records: 5 days demand for basics
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for accuonting records, executive committee meetings, must:
(1) demand in gf/ for a proper purpose (2) describe records with particularity |
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DISTRIBUTIONS
preferred = pay first |
improper if corp insolvent
*cash flow = corp would not be able to pay its debts as they come due OR *balance sheet - net assets would be less than total liabilities |
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Right of Dissenting SH to force corp to buy her shares for fmv
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1. Merger
2. Sale of all assets 3. Share exchange 4. Amdt of charter |
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RQMTS to Dissent and Seek Appraisal
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1. file written objection before vote
2. vote against or abstain 3. afte vote, make written demand to be bought out |
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MERGER
effect: surviging entity succeeds to all rts/ liabililties of constituent |
BoD approval, recommendation to SHs.
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DISSOLUTION
(Voluntary - Bd approval and approval by maj of SHs entitled to vote) (Involuntary-creditor's petition OR SH petition) |
SH petition:
1. director deadlock and irreparable injury threatened 2. SH deadlock + failure to elect directors for 2 years 3. illegality by those in control 4. misapplication fo corp's assets |
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FED SECURITIES LAW CONSIDERATIONS
Possible Ps: SEC, private buyer/ seller of securities |
Rule 10b-5: misreps of matieral info, nondisclosure of material info, tipping
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Two Theories under which to PCV:
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1. alter ego analysis
2. enterprise liability (same factors/ circumstances to be considered) |
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"Alter Ego"
(more general) |
domination through overlapping boards and officers, mgmt
undercapitalization disregard of corp formalities (board meetings, issuance of stock certs, etc.) siphoning of funds |
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"Enterprise Liability"
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applies when a parent corp owns all of stock of a subsidiary corp
ONLY APPLIES WHEN PARENT AND SUBSID IN SAME BUSINESS (can show they are, in fact, one enterprise) |
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Deep Rock doctrine
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when a corp is insolvent and some SHs have claims as creditors, court may sub the their claims to those of other creditors
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Effect of Administrative Dissolution of a Corp:
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Dissolution, whether voluntary or involuntary (SoS or SH) does NOT terminate corporate existence.
Corp will continue to exist for purposes of winding up its affairs. |
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Winding Up upon Dissolution:
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must give notice (known creditors given actual notice must assert rts w/in 4 mos; unkown via publication--have four years)
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Dissolution
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If dissolved corp's assets have been distributed in liquidation, a claim against eh corp may be satisfied against a SH to the extent the SH's pro rata share of the claim, up to amt distributed to SH
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Duty of Loyalty when a conflict of interest in a particular transaction
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Director must notify other Dirs or SHs of all material facts and disinterested maj may approve.
In absence of such approval, interested director may still not be liable if transaction was fair to corp |
