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65 Cards in this Set
- Front
- Back
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I. Choosing a form of organization
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b. Limited Liability
c. Management d. Continuity of existence: a corporation has perpetual existence e. Transferability: ownership interests freely transferable in corporation f. Federal income tax: g. LLC’s: neither a corporation nor partnership |
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a. Partnership--
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i. Two kinds
1. General: two or more people who carry on a business as co-owners a. Can come into existence by operation of law b. Any partnership is general unless special requirements for limited partnership are complied with 2. Limited: created where (1) there is a written agreement and (2) a formal document is filed a. Two types of partners in LP i. General: personally liable for the debts of the partnership ii. Limited: not liable beyond the amount they contributed |
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b. Limited Liability
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i. Corporations: shareholder limited to the amount he has invested
ii. Partnership: depends on whether the partner is general or limited 1. limited partner will lose limited liability of he actively participates in the management of the company iii. Limited Liability Partnership: each partner may participate fully in the business affairs without becoming liable |
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c. Management
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i. Corporations: centralized
1. shareholders participate only by electing B of D 2. B of D supervises corporate affairs 3. High-level executives appointed by the Board ii. Partnership: management not centralized 1. all partners have an equal voice 2. in limited partnership, partners may not participate in management |
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d. Continuity of existence: a corporation has perpetual existence
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i. A general partnership is dissolved by the death or withdrawal of a general partner unless otherwise agreed to
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e. Transferability: ownership interests freely transferable in corporation
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i. in partnership, all partners must consent to transfer of all rights
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f. Federal income tax:
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i. Corporations: taxed as a separate entity
1. “double tax”: a corporate level tax on corporate profits, followed by a shareholder tax on the dividends ii. Partnership: not taxed as separate entities 1. Actual tax paid by individuals on their person tax returns iii. Subchapter S corporations: does not get taxed at the corporate level S corp: -no more than 75 SHs -no more than 1 class of stock -all SHs must be individuals or qualified estates or trusts AND -no Sh may be a nonresident alien |
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g. LLC’s: neither a corporation nor partnership
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i. Unlike a partnership, each member is liable only for the amount of his capital contribution
ii. Unlike a corporation, the members can elect to be treated as a partnership or corporation for tax purposes iii. Operating agreement: determines how an LLC will operate 1. LLC bound even if it is signed by the members and not the LLC itself iv. Piercing the veil: can be pierced to make the member liable |
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II. Forming a Corporation
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a. Where and how to incorporate:
Close corporation b. Public corporation c. Corporate Powers Clause: what is the importance? d. Ultra Vires: acts attempted by a corporation that are beyond the scope of powers granted by the corporation's charter e. Promoter: one who takes initiative in forming a corporation f. Piercing the Corporate Veil: can hold shareholders personally liable for the corporation’s debt g. What are legitimate corporate activities? h. What is the role of a corporation in terms of social responsibility? |
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a. Where and how to incorporate:
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1. Closely held: incorporate in the business’s principle place of business
2. Publicly held: usually incorporate in Delaware ii. Mechanics of incorporating: 1. Articles of incorporation: file with the Secretary of State A RAINS -address -registered agent -incorporators -name -share information a. Can be amended after filing 2. Bylaws: rules governing the corporations internal affairs a. Don’t have to be filed with secretary of state |
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b. Close corporation:
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DAN'S ROT
Designation in Articles; Number of Shareholders[>30?]; Restrictions on Transfer i. Has one of the following traits 1. A small number of stockholders 2. Lack of any ready market for the corporation’s stock 3. Substantial participation by the majority stockholders in the management ii. can often make company-changing decisions much more rapidly than a publicly traded company |
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c. Public corporation
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i. : the shares are traded on a public market (e.g., the New York Stock Exchange or Nasdaq) designed specifically for the buying and selling of shares of stock of corporations by and to the general public
ii. people invested in a publicly traded company will each take a much smaller hit to their own capital |
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d. Corporate Powers Clause: what is the importance?
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i.) In S.C., unless the articles of incorporation provide otherwise, every corporation has perpetual succession and has the power to do all things necessary and convenient to carry out its business affairs, including the right to:
1.) sue and be sued 2.) have a corporate seal 3.) acquire, hold & dispose of real property 4.) elect directors & appoint officers 5.) conduct business inside and outside of the State 6.) establish a pension or other incentive and compensation plan 7.) acquire, hold, vote, and dispose of securities in other corporations 8.) make contracts of guaranty and suretyship 9.) make donations for the public welfare or for charitable, scientific, or educational purposes |
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e. Ultra Vires:
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acts attempted by a corporation that are beyond the scope of powers granted by the corporation's charter
i. Modern Statutes have generally eliminated it ii. Only limit today is that the action be lawful iii. Also have an implied power to make reasonable charitable donations |
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f. Promoter:
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one who takes initiative in forming a corporation
i. May occasionally be liable for debt he contracts on behalf of a yet to be formed corporation ii. If he knows the corporation had not been formed, but the third party does not, he will be liable on the contract 1. If the corporation adopts the contract, the promoter may escape liability a. NOVATION b. Adoption will be implied if the corporation accepts the benefits of the contract…etc. iii. If the contract says the corporation not yet formed, the liability of the promoter depends on what the parties intended iv. If the corporation is never formed, the promoter is liable on the contract v. 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 1. cannot pursue his own profit at the corporation’s expense |
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g. Piercing the Corporate Veil:
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can hold shareholders personally liable for the corporation’s debt
i. Individual Shareholders ii. Parent/subsidiary: iii. How does it differ from subordination? iv. South Carolina 8 Factor Test |
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i. Individual Shareholders
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1. Tort: more likely to pierce the veil in tort rather than contract
2. Fraud: grievous fraud or wrongdoing by the shareholders 3. Inadequate capitalization: not enough for veil piercing a. Zero Capital: if the shareholder invests no money whatsoever, courts are more likely to pierce b. Siphoning: not enough initial capital, or if profits are siphoned out as earned 4. Failure to Follow Corporate Formalities |
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ii. Parent/subsidiary:
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1. No liability generally
a. Dominance over subsidiary not enough: examples i. Drains excess cash ii. Demands a veto power iii. Control over subsidiary’s operations 2. Factors: FIFE FIB Fraud; Inadequate Financing; Enterprise; Formalities; Intermingling; Benefit of parent a. Fail to follow separate corporate formalities b. Operating pieces of the same business and subsidiary is undercapitalized c. Public misled about who is running subsidiary d. Assets are intermingled e. Subsidiary operated in unfair manner i. Single economic unit theory |
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iii. Brother/sister (enterprise liability):
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often treated as one individual enterprise
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iv. How does it differ from subordination?
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1. Same principles (fraud…etc) that lead a court to disregard the corporate form to hold a shareholder liable may lead a bankruptcy court to make the claim subordinate to claims of non-insiders, under the doctrine of “equitable subordination”
a. Insiders claims will only be satisfied after all other creditors b. As a general rule, the inside creditors will receive nothing c. Court applies whenever fair or equitable to do so 2. Deep Rock Doctrine: doctrine of equitable subordination 3. Less of a departure from ordinary corporate practice required for a bankruptcy court to apply DRD FUNDAMENTAL DIFFERENCE--in PCV SHs must PAY the corp's debts. IN DRD, their claims merely get placed behind the claims of nonshareholder debts. |
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v. South Carolina 8 Factor Test
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Ferdinand Found Fish In Cleveland
1. Fraud 2. Few Shareholders[close corp.] 3. Formalities 4. INadequate Capitalization 1. Whether the corporation was grossly undercapitalized 2. Failure to observe corporate formalities 3. Non payment of dividends 4. insolvency of the debtor corporation at the time 5. siphoning of funds of the corporation by the dominant stockholder 6. non functioning of other officers or other directors 7. Absence of corporate records 8. the fact that the corporation was merely a facade for the corporations of the dominant stockholder All factors need not be met, but if the requirements are sufficently met, then move to fundamental fairness test (1) ∆ was aware of π's claim against the corp. AND (2) thereafter, ∆ acted in a self-serving manner wrt corp property and in disregard of ∆'s claim in property |
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h. What are legitimate corporate activities?
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i. What is the role of a corporation in terms of social responsibility?
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III. Financing the Corporation
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a. How is a business valued?
b. How is the corporation’s initial capital raised? c. How is the stock priced and sold? d. Is par stock more valuable than no-Par? e. What capital structure is best? f. What are pre-emptive rights? g. What does a corporate balance sheet show? Securities |
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a. How is a business valued?
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stock--5 features
1. right to receive dividends contingent upon appointment of profits 2. negotiability 3. ability to be pledged or hypothecated 4. voting right in proportion to # of shares owned 5. ability to appreciate in value |
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b. How is the corporation’s initial capital raised?
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i. Subscription for shares before incorporation
ii. A Subscription an agreement for the purchase of shares to be issued by a corporation. They are entered into before a corporation is formed. |
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c. How is the stock priced and sold?
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corp. articles of incorporation specifies # and type of shares which corp is authorized to issue.
minutes of the BOD meeting authorizing the sale must specify: 1. # of shares 2. stockholder who is buying the shares 3. consideration to be paid for the shares--can be money, goods or services --directors must calculate the value received for stock is worth some monetary amount expressed in dollars |
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d. Is par stock more valuable than no-Par?
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i. Par stock: The face value of a bond or stock. A security trading for its face value is said to be selling at par.
ii. No-par value stock: Stock that is issued without the specification of a par value indicated in the company's articles of incorporation or on the stock certificate itself. iii. Most shares issued today are classified as no-par or low-par value stock. No-par value stock prices are determined by what investors are willing to pay for them in the market. iv. Companies find it beneficial to issue no-par value stock as they have flexibility in setting higher prices for future public offerings and have less liability to shareholders in the case that their stock falls dramatically. |
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e. What capital structure is best?
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i. A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds
ii. A company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered. |
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f. What are pre-emptive rights?
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i. The right of current shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of any future issue of common stock.
ii. Most states consider preemptive rights valid only if made explicit in a corporation's charter; also called subscription privilege or subscription right. |
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g. What does a corporate balance sheet show?
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i. Reflection of what the company owns and owes.
ii. The strength of a company's balance sheet can be evaluated by three broad categories of investment-quality measurements: 1. working capital adequacy, 2. asset performance and 3. capitalization structure. |
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h. Securities
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i. Fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities, such as banknotes, bonds and debentures, and equity securities, e.g. common stocks. The company or other entity issuing the security is called the issuer.
ii. include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units iii. What is the federal and state interest in issuance of corporate securities? 1. Federal Regulation: Securities Act of 1933 a. Requirements i. Registration Period 1. A registration statement MUST be filed with the SEC before a corporation can begin offering shares of stock to the public. ii. Full Disclosure 1. Corporations, through their SEC registration, are required to fully disclose all pertinent facts to any and all perspective investors. 2. State a. SC Blue Sky Law applies b/c basically SC adopts the position that we coordinate our securities regulation w/the feds; if you filed a regulation statement under the SEC, the SC regulation doesn’t really exist; if you only filed w/the state, then all the state regulations come into play b. prohibition against fraud in the sale of securities, registration requirements for brokers and dealers, registration requirements for securities to be sold within the state, and sanctions and civil liability iv. What is the lawyers’ role in the sale of securities in the public? 1. checks to see that it is issued properly under 33-6-210 2. sale of securities controlled by Securities Act of 1933 3. May help navigate the waters of Securities REgistration |
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IV. Distributions: payment for capital
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a. What kind of payments/distributions can a corporation make and to whom?
b. When can a corporation repurchase its own shares? c. What is the legal difference between dividends, distributions, repurchases and redemptions? |
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a. What kind of payments/distributions can a corporation make and to whom?
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i. A board of directors may authorize and the corporation may make distributions to its shareholders subject to restriction by the articles of incorporation and the limitation in subsection (c).
ii. All states have placed limit on the payments of corporate dividends, to protect creditors by assuring that dividends will not be paid if the payment will leave the corporation unable to pay off its own creditors iii. Statutes allow the payment of dividends if (1) payment of the dividend will not impair the corporation’s stated capital, and (2) payment will not render the corporation insolvent |
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b. When can a corporation repurchase its own shares?
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(a) A corporation may acquire its own shares, and shares so acquired constitute authorized but unissued shares.
(b) If the articles of incorporation prohibit the reissue of acquired shares, the number of authorized shares is reduced by the number of shares acquired, effective upon amendment of the articles of incorporation. (c) The board of directors may adopt articles of amendment under this section without shareholder action and deliver them to the Secretary of State for filing. The articles must set forth: |
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c. What is the legal difference between dividends, distributions,
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c. What is the legal difference between dividends, distributions, repurchases and redemptions?
i. Dividends: cash or property payments made by a company to its shareholders. When a company earns a profit, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders of the company as a dividend 1. decision regarding the amount and frequency of dividends is solely at the discretion of the board of directors ii. Distributions: paid to investors; usually made up on income and may include a capital payment to investors iii. Repurchases: Occurs when a corporation repurchases outstanding shares of its stock from shareholders. In SC, repurchased shares revert to being authorized, but unissued, shares unless the Articles of Incorporation provide otherwise. iv. Redemption: Involves the corporation’s acquisition of some or all of a class of its outstanding shares by paying a stipulated redemption price (stated value in SC) to the shareholders, who must then surrender their certificates |
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V. Controlling the Corporation
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a. General Allocation of Power
b. Board of Directors c. Officers d. Shareholder Action e. What are the differences in problems of control between large and small corporations? f. What are the consequences of a manipulation of control? g. Is “vote selling” by shareholders permitted? h. What is “classified” voting? “Cumulative Voting”? How do they work? i. How are directors monitored? j. Shareholders Informational Rights k. How is their inspection right different than partners/limited partners/LLC members? l. Closed Corporation m. What are majority shareholders duties in the close corporation? n. Federal Regulation of Voting: the Proxy in a public company |
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a. General Allocation of Power
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i. Traditional scheme for allocating power is:
ii. Power of shareholders iii. Power of directors iv. Power of officers |
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i. Traditional scheme for allocating power is:
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1. Shareholders act by:
a. electing and removing directors b. approving fundamental changes 2. Directors: a. Manage the corporation’s business b. Formulate policy c. Appoint officers 3. Officers: a. Administer the day-to-day affairs 4. Power structure can be modified |
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ii. Power of shareholders
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ii. Power of shareholders
1. Directors a. Election of directors b. Right to elect directors to fill vacancies c. Allowed to remove directors even without cause 2. Can amend articles and bylaws 3. Vote on fundamental changes |
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iii. Power of directors
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1. shareholders cannot order the B of D to take any particular action
2. Appoints officers 3. supervises the officers 4. Do not run day-to-day operations |
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iv. Power of officers
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1. day-to-day affairs
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b. Board of Directors
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i. Elected by shareholders
ii. Number of directors usually fixed in either articles or bylaws iii. Most statutes allow vacancies to be filled by either the shareholders or the board iv. Can be removed by shareholders with or without cause 1. a director may not be removed by his fellow board members v. Directors’ meetings 1. Regular v. special a. Prior notice required for a special meeting 2. Quorum: the board may only act if a majority of the total officers are present vi. Act of Board: may usually only take action by a vote of the majority 1. Can only take action at a meeting, not by any individual member 2. Can take action without a meeting with unanimous written consent 3. Can ratify an action taken by an individual member 4. If the Board appoints committees, they can take any action that the B of D would normally be able to take |
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c. Officers
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i. Can be fired by the Board with or without cause
ii. Agent of the corporation iii. Four doctrines must be used to find an officer can bind the corporation |
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c. Officers--
iii. Four doctrines must be used to find an officer can bind the corporation |
1. Express Actual Authority
2. Implied actual authority a. President i. Has the power to bind the corporation only in ordinary business actions b. Secretary: i. Has the power to certify the records of the corporation c. Removal: board may remove implied authority that otherwise would have existed 3. Apparent Authority: two requirements a. The corporation must indicate to the world the officer has the authority to do the act in question b. Plaintiff must be aware of these indications and rely on them i. President received apparent authority simply through the title 4. Ratification a. Need to show acceptance of benefits or that there was detrimental reliance |
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d. Shareholder Action
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i. Annual Meetings required by law
1. Special meetings may be called by the board, someone else specified in the bylaws, and in some cases, a majority shareholder ii. Need a Quorum for a shareholder vote to be binding iii. Action will be approved if a majority of shares actually present vote in favor of it |
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e. What are the differences in problems of control between large and small corporations?
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i. Small:
ii. Large: |
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f. What are the consequences of a manipulation of control?
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g. Is “vote selling” by shareholders permitted?
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h. What is “classified” voting? “Cumulative Voting”? How do they work?
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i. Cumulative voting: a shareholder can aggregate his votes in favor of fewer candidates than there are slots available when voting for the Board of Directors
ii. As opposed to straight voting |
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i. How are directors monitored?
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i. Directors can be removed by a majority of the shareholders, with or without cause, or by a court order
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j. Shareholders Informational Rights
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i. The holder has the right to inspect the corporate records in general
ii. Need to have a proper purpose 1. Evaluation of investment OR 2. Deal with fellow shareholders to take group action concerning the corporation iii. Not a proper purpose 1. Unrelated personal goal 2. Social political Goal iv. As long as there is at least one proper purpose, the inspection will be allowed 1. Courts will normally try to ascertain the “real” purpose 2. If the “real” reason is illegitimate, inspection will not be allowed even if the shareholder states legitimate reasons v. In most states, the corporation is not required to send an annual report to its shareholders vi. A director, on the other hand, has a virtually automatic right of inspection 1. unless he is acting with “manifestly improper motives” |
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k. How is their inspection right different than partners/limited partners/LLC members?
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i. Partnership
1. each partner is entitled to access to the partnership books and records and may inspect and copy them 2. books and records must be kept at principal place of business 3. On demand, a partner must present to any partner full and complete information on all things affecting the partnership business ii. Limited Partners: each limited partner has a right to 1. Inspect and copy any partnership records required to be maintained 2. Obtain from a general partner, on reasonable demand, full information regarding the state and financial condition of the partnership business, income tax returns, and other info concerning the partnership that is just and reasonable iii. LLC 1. each member of an LLC is entitled to inspect and copy the books and records of the LLC during regular business hours |
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l. Closed Corporation
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i. Shareholder voting agreement
ii. Voting trust iii. Classified Stock and weighed voting Control iv. What are the “rules” in sale of stock in close corporations? |
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i. Shareholder voting agreement
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1. agreement in which two or more shareholders agree to vote together as a unit on certain matters
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ii. Voting trust
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1. the shareholders who are part of the arrangement convey legal title to their shares to one or more voting trustees
2. no longer have voting power, but still receive dividends and sale proceeds |
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iii. Classified Stock and weighed voting
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1. the corporation sets up more than on class of stock and gives each class different voting or financial rights
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iv. Control
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1. Shareholders can make decisions without holding meetings of the board of directors, and can fill vacancies on the board without a vote of the shareholders.
2. Can restrict share sales 3. Much less formal than a publicly traded company 4. Shareholders in close corporations have a great degree of control over other shareholders who wish to sell their shares to outsiders. Typically, close corporation shareholder agreements contain buy-sell provisions that give existing shareholders first rights of refusal with respect to subsequent sales or transfers of shares 5. Shareholders have increased responsibility and participation. |
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v. What are the “rules” in sale of stock in close corporations?
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1. Five principal techniques for restricting share transfers
a. First refusal i. Have to first offer to sell your shares to the corporation first b. First option i. Similar to first refusal, except that the price is determined by the agreement creating the option c. Consent i. Transfers may be made subject to the consent of the board of directors d. Stock buy-back right i. Can buy back the stock on the happening of certain events, whether the holder wants to sell or not e. Buy-sell agreement i. Same as buy-back right, except corporation is obligated to go through with the purchase upon the happening of a specified event 2. Most transfer restrictions require some valuation to be placed on the stock at some point; four common techniques a. Book value: corporation’s assets minus liabilities b. Capital Earnings method: attempt to estimate the future earnings of the business c. Mutual agreement: parties agree on an initial fixed valuation d. Appraisal: parties agree in advance on a procedure by which a neutral third party will be selected |
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m. What are majority shareholders duties in the close corporation?
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i. Duty to run the Company in a manner that does not damage minority holders’ position and the worth of their shareholding, often done deliberately and often by misapplying or misusing Company assets
ii. Majority shareholders have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner. iii. Any use of power must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation's business. iv. Rule of inherent fairness from the viewpoint of the corporation and those interested therein |
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n. Federal Regulation of Voting: the Proxy in a public company
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i. Proxy Contests
ii. Can small shareholders propose corporate action? How? iii. What are the anti-fraud rules in the proxy area? (Rule 14a-9) |
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i. Proxy Contests
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1. competition between management and group pf outside insurgents to obtain shareholders votes on a proposal
2. most involve the election of directors 3. Tightly regulated by the SEC 4. Who pays the cost? a. Corporation may usually pay for any reasonable expense incurred by management b. If the insurgents are successful at getting control, they will usually be able to have the court reimburse them |
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ii. Can small shareholders propose corporate action? How?
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1. do not have the power to conduct business directly on behalf of the corporation
2. Cannot order the B of D to do anything |
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iii. What are the anti-fraud rules in the proxy area? (Rule 14a-9)
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1. 14a-9 prohibits the use of proxy solicitation materials that contain “any statement which, at the time and in the light of the circumstances under which it was made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading…”
2. shareholder has the implied right to bring a private action |
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Voting by Proxy
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Proxy--power granted by SH to another person to exercise his voting rights--normally proxy holder is angent
--must be inwriting -revocable unless expressly states that it is coupled with an interest |
