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226 Cards in this Set
- Front
- Back
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What does an incorporator do?
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Draw up and file the papers w/ the secretary of state
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Who can be an incorporator?
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An individual or an entity
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Articles of incorporation
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Are a K between corp and s's, and a K between corp and state
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Info that belongs in articles - names/addresses
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Name of corporation
Name/add of each incorporator Name/add of each initial director Name of registered agent and address of registered office (legal rep) |
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Types of corps
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Corporation, company, incorporated, limited
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Statement of duration for corp
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Not required--just means it has perpetual existence
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Statement of purpose for corp
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Need a statement of purpose to indicate (unless presumption exists)
General purpose ok |
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Traditional - ultra vires rules (common law)
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If the corp goes into a K that goes beyond the corp's statement of purpose, the K can be voided
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Modern ultra vires rules
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Ultra vires Ks are valid
S can seek an injunction Responsible managers are liable to corp for UV losses |
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Types of stock
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Authorized stock - max # of shares corp can sell
Issued stock - number of shares the corp actually sells Outstanding - shares that have been issued but not reacquired |
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Steps to form a corp
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People
Paper Act |
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Act
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Delivery of notarized articles
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Delivery and acceptance of articles
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equals de jure corporation
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Organizational meeting
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held by board of directions at creation of corp (selects officers, adopt bylaws, etc)
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Legal significance of forming corp
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Internal affairs of corp governed by law of state in which corp formed
Corp is a separate legal person (can sue, be sued, hold property) |
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Taxation of corp
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Double tax - taxed on profits and taxpayers are taxed on distrubtion
Avoid by forming S corporation |
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S corporation
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Doesn't pay income tax at corp level
Has no more than 100 shareholders (all human, citizens/residents) No publicly traded stock |
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Liability of directors and officers of corp
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NOT liable
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Liability of S's for corp
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NOT liable
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Limited liability
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S's generally liable only for the price of their stock
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Who is liable for what the corp does?
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The corporation itself
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De Facto corporation requirements
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- relevant incorporation statute
- the parties made a good faith, colorable attempt to comply with it; and - some exercise of corp privileges act |
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Assertion of de facto corp doctrine
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Anyone asserting doctrine must be unaware of failure to form de jure corporation
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Exception to de facto corp
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Business treated like corp except in an action by the state
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Example of de facto
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Incorporator sends articles in but they get lost in the mail, and in meanwhile operate as a corp
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Corporation by estoppel
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One who treats a business as a corporation may be estopped from denying that it is a corporation (works in the reverse too)
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Corp by estoppel only applies
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to contract cases (NOT TORT!!!)
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What is the status of de facto corp and corp by estoppel
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Abolished in MANY states (but if alive, here is how they work)
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Are corporations required to have bylaws?
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No, but most corps do for internal governance
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Who adopts initial bylaws
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Not filed w/ state, adopted by the initial board of directors
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Who can amend/repeal bylaws
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The S's, but in some states the board also can.
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If bylaws conflict w/ articles, which control?
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The articles (K with state)
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Pre-incorporation contraccts
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Not liable on pre-corp K until adopted (either express or implied)
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Promoter
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One who is acting on behalf of a corp not yet formed (who might enter into a K)
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Implied adoption
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Occurs when the corp accepts a benefit of the K
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Liability of the promoter
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Unless K provides otherwise the promoter is liable on pre-incorp K until there is a NOVATION
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A novation
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an agreement is an agreement between the promoter, the corporation, and the party to the contract to replace the promoter with the corp
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Make sure to distinguish NOVATION and ADOPTION
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Novation means P no longer liable
If adopted, he's still liable (and so is he corp) |
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Foreign corporation
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one incorporated outside of the state
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Foreign corp
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must qualify and pay fees to state
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Transacting business means
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The regular course of intrastate activity
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How does a foreign corp qualify?
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By getting a certificate of authority from the secretary of state (by giving information from articles and good standing)
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What if foreign corp conducts activity w/o qualifying?
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It must pay a civil fine and cannot sue in the state (but it can be sued and defend)
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Issuance (as in issuance of stock)
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When corp sells its own stock - a way for corp to raise capital
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Subscriptions
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Written offers to buy stock from corporation
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Revocation of pre-incorp subscriptions
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S cannot change his mind and revoke a decision to buy pre-incrop subscriptions FOR SIX MONTHS
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Are post-incorp subscriptions revocable?
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Yes, until accepted by the corp
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At what point are corp and subscriber obligated?
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When the board accepts the offer.
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What must a corp receive when it issues stock?
*** |
Raises issues of form and amount of consideration
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Form of consideration
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SPLIT of authority
- every state agrees that money, property, services already performed by the corp - BUT some states prohibit promissory notes and future services, while other states permit these instruments |
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Par
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means minimum issuance stock (ie C is issuing 10,000 shares of 3 par stock, it must receive at least 30,000 but can receive more)
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No par
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No minimum issuance price
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Treasury stock
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Stock that corp issued and then reacquired -- then considered authorized but unissued and corp can resell
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Who determines value of goods or past services
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The board, and is valid if made in good faith
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Watered stock
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Shortage between stocks issued and par authroized.
(IE 10,000 shares of 3 par stock to X for 22,000) |
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Who is liable for shortage of issued stock
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The board if they knowingly authorized the issuance;
also the guy who was issued the stock |
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What if X transfers watered stock to a third party
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Third party NOT liable if TP did not know about the water
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Preemptive rights
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Right of an existing S to maintain share of exiting ownership by buying stock whenever there is a NEW issuance of stock for MONEY
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Does new issuance include treasury stock?
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SPLIT authority
Some states yes, some states no |
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If articles are silent as to preemptive rights--do they exist?
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Majority - NO
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Suppose C corp articles provide for pre-emptive; you own 20% of stock; c corpissues stock to Peggy to buy property from Peggy. Do you hav epre-emptive rights?
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NO!!!! Pre-emptive is for $$$$ ONLY!!
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Statutory requirements for directors
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Adult natural persons
1 or more Usually named by articles, and after that elected by shareholders Removed by shareholders by majority of shares entitled to vote Vacancies selected by board or S's |
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Who elects directors after articles?
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Shareholders at annual meeting
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On what basis can S remove director?
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With or without cause
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If S's created vacancy by removing D
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they will select the replacement
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D can only take an act in one of two ways...
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- UNANIMOUS agreement IN WRITING OR
- at ameeting |
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Where directors decide to take an act through oral conversation, without unanimous consent or at a meeting -
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that act is VOID but may be ratified by a VALID act
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Is notice required for regular meetings
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NO
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Is notice required for special meetings
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YES - it must state when/where
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Failure to give notice for special meetings
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voids whatever acts taken at the meeting, unless director not notice waived the notice defect in writing
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Can directors give proxies or enter voting agreements for how they will vote as directors
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NO
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S voting
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They can have proxies and voting agreements
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Meetings of the board - how many directors must show up?
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Quorum - majority of Ds
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How many directors to pass a resolution
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Majority vote of those who are present
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Once quorum of Ds disperses
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You cannot hold a vote on a resolution (shareholder voting different)
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Role of Ds
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They manage business of corp
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A committee of directors which has been delegated tasks cannot...
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set director compensation or declare distributions
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D's duty of care
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Burden is on the Plaintiff to show that the director has breached AND a loss to the corp
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Duty of care standard
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D owes the corp a duty of care, and act in good faith and act how a prudent person would with regard to his own business
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D only liable if
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the breach of a duty of care caused a LOSS to the corporation
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Misfeasance
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Board does something that hurts the corp (causation is de facto)
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Business Judgment Rule BJR
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A ct will not second guess a business decision if it was
- made in good faith - was informed - and had a rational basis deliberate, analyze |
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Prudent people do...
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appropriate homework
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A D is not
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a guarantor of success
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D's duty of loyalty
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Burden on the defendant
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Standard for duty of loyalty
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The D owes the corp a duty of loyalty: must act in good faith and with a reasonable belief that what she does is in the corp's best interest
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Duty of loyalty does not have a BJR standard b/c
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it involves a conflict of interest
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Interested director transaction
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Any deal between the corp and one of its directors or another business of the D
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Interested director transaction set aside (or D liable for damages) unless
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interested D shows
- deal fair to the corp when entered OR - her interest and relevant facts disclosed or known and deal approved by either a majority of disinterested Ds OR majority of disinterested shares |
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Interested D transaction quorum requirement
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Often, interested Ds count toward quorum
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Fairness requirement
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some cts require this regardless
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Compensation of Ds
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can be set D, but must be reasonable and in good faith
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Competing ventures
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A D owes corp a fiduciary duty, thus he may not breach that duty by competing directly with the corp
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Corp opportunity (expectancy)
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A D cannot usurp a corp opportunity, thus he must
- tell the board about it and - wait for the board to reject the opportunity |
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Is inability to pay for opportunity a corp's rejection of that opportunity?
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Generally not a defense
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Remedy for corp opportunity violation?
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The D (if he still has it) must sell it to corp at his cost. If sold at profit, he must turnover profit to corp
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What is a corporate opportunity?
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What is a corp expectency - something the company has an interest or expectancy in; or something the D found on company time or using company resources
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State law bases for director liability?
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Ultra vires acts
Improper Distributions Improper Loans |
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Loan to director
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OK - but only if reasoanbly expected to benefit the corp
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Sarbanes-Oxley
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Never been on the bar, but
acts as fed law, forbids loans to execs in large registered corps CEO and CFO must certify accuracy |
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Which directors are liable for all things directors can be liable for
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D's are presumed to concur wit hall board action unless dissent or abstention is noted IN WRITING in corporate records
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How abstention or dissent is recorded in writing
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- minutes OR
- delivered in writing to presiding officer at the meeting OR - written dissent to corp immediately after the meeting |
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Cannot dissent...
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if you voted for the resolution at the meetin
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Exceptions to the presumption of concurrence
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An absent D is not liable for stuff done at the meeting missed OR
Good faith reliance on info presented by an officer, employee, or committee of which D was not a member, or professional reasonable believed competent |
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What about duties owed by officers?
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They owe the same duties of care and loyalty as directors
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Officers - agents?
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Officers are agents of the corp; they can bind the corp by acts for which they have authority to bind it
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How many people to fill the traditional officer roles?
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Can all be done by one person (thus one person can be pres, secretary, treasurer)
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Who selects and removes officers
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The board, which also sets compensation
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Corp's liability for board actions
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May be liability for a breach of K contract
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Summary of who hires/fires
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Shareholders hire/fire directors
Board hires/fires officers S's do not hire/fire officers |
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Indemnification of directors/officers situations
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Situation A: someone sued by corp in her capacity as a D or O and incurs costs/fees and seeks indemnification from corp.
Situation B |
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Indemnification categories
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No indemnification allowed - when D/Oheld liable to corp OR to have received an improper personal benefit
Mandatory indemnification - when D/O won a judgment Permissive indemnification - ie D/O settles |
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Permissive indemnification - D/O must show
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acted in
good faith and with reasonable belief that acting in best interest of corp (same as duty of loyalty) |
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Ct order re indemnification
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Ct can order, but if D/O liability, then limited to costs and fees
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Articles and director liability to corporations
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Articles can eliminate D liability for damages, but it's limited to duty of care issues
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Articles and officer liability to corporations
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SPLIT
some states allow it, but in other states, can't limit liability |
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Do shareholders get to manage the corp?
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No - because the board manages, exception: close corporation
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What are the characteristics of a close corporation
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- few shareholders
- stock not publicly traded |
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If shares not publicly traded, S's can...
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eliminate the board of directors
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How is elimination of board accomplished?
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- in the articles of bylaws and approved by all shareholders
- unanimous written shareholder agreement |
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Who owes duty of care and loyalty if board eliminated
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The managing shareholders
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In close corporation, b/c it's like a partnership, shareholders may have a duty...
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not to oppress each other, ie by selling control to people who loot the corp. If minority is oppressed, he can sue the controlling shareholderd (b/c no public market)
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May a PC (partnership of attys, docs, cpas) hire non-professionals?
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Yes, but not to do the professional duties
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Are professionals liable for malpractice
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YES
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Shareholders liability for corporate obligations?
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Generally not liable for the PC's malpractice or other shareholder's malpractice
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Do general corporation rules apply to a PC?
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Yes
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Liability of shareholders for debts of corporation
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Generally, no -- bc the corp is liable for what it does.
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Shareholder's personal liability in close corporations
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May be liable if the corporate veil is pierced
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Piercing the corporate veil
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Only applies in close corporations
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Holding the close corp shareholder liable
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Shareholder must have abused the priv of incorporating
Fairness requires holding them liability |
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PCV standard
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Cts may pierce the corporate veil to avoid fraud or unfairness
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Alter ego fact pattern
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PCV - Shareholder treating corp assets as his own
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Undercapitalization fact pattern
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PCV - Ct might PCV b/c the corp was undercapitalized WHEN FORMED. S's failed to invest enough to cover prospective liabilities
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PCV more likely in a ____ action
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Tort rather than contract action
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PCV and related corps
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Can operate to get at a corp's related/parent corp
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Derivative suit
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S is suing to enforce the corp's claim
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Derivative suit test
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Could the corp have brought this suit
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If S-plaintiff wins a derivative suit, who gets the $
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The corporation
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If S-plaintiff wins a derivative suit, does the S-P get costs/fees?
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Yes
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If S-plaintiff loses, can she get costs/fees from corp?
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NO - may even have to pay opposing side's costs/fees as well (corp will nto reimburse)
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Can other S's sue the same def's on same transaction?
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NO - claim preclusion
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Requirements to bring derivative suit
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Stock ownership (can be owned through operation of law, ie inherit)
Adequate representation of corp's interest Make written demand on corp that corp bring the suit (and wait 90 days after making demand) BUT need not make if it would be futile (ie D's will be defs) |
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Joinder of corp in derivative suit
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Must be joined as as def
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Can parties settle/dismiss a derivative suit?
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Only w/ ct approval
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Derivative suit motion to dismiss
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Corp can move to dismiss upon showing that ind investigation showed the suit was not in the corp's best interest (ie expense v recovery)
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Ruling on MTD derivative suit
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Ct will always examine whether those recommending dismissal are truly independent and in some states, ct will also check whether it truly is in the company's best interest
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Shareholder voting - who votes
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The record shareholder as of the record date
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Record S is
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the person shown as the owner in the corp recrods.
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Record date
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is the voter eligibility cut-off
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Record date and stock re-acquirement by corp
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Corp will never vote on treasury stock
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Death of shareholder for voting purposes
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If S dead on record date, the executor can vote the shares
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Proxy voting by shareholder
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Writing (fax email ok), directed to the secretary, authorizing another to vote your shares
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Can S revoke her proxy even though it states irrevocable
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Yes
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How can you create irrevocable proxy?
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A proxy coupled with an interest:
Thus, proxy says irrevocable, and proxy has an interest in the shares other than voting |
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Requirements for voting TRUST
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- written trust, controlling how shares will be voted;
- copy to the corporation - transfer legal title to the voting trustee - original shareholders receive trust certificates and retain all shareholder rights except for voting |
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Requirements for voting AGREEMENT
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- agreement must be in writing and signed
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Problems with voting agreements
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SPLIT
some states find specifically enforceable some states no specific enforcement |
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Where do S's vote?
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Usually at a meeting, but can also
written unanimous consent |
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Two kinds of shareholder meetings
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Annual meeting - to elect board of directors
Special meeting - can be called by the board, the pres, or the holders of at least 10% of the voting shares, or anyone else authorized by bylaws |
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Notice requirements for shareholder meetings
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Usually just special meetings, must be written, and tell when, where and why (b/c it limits what can be done at special meeting)
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Consequence of failure to give proper notice to all S's
*** |
Voids all actions at meetings, unless waived
express - in writing implied - attended meeting w/o objection |
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How do shareholders vote
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Requires quorum based on SHARES, not shareholders
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Cumulative voting equation
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Shares x directors to be elected
only available when shareholders elect directors |
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When is cumulative voting allowed?
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When articles allow it. If silent, generally now cumulative voting
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Stock transfer restrictions
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Upheld provided they are reasonable under the circumstances, thus not an undue restraint on alienation (ie right of first refusal)
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Is a stock restriction valid against transferee (third party)
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Cannot be invoked transferee unless conspicuous or transferee had actual knowledge
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Right of shareholder to inspect and copy books and records - standing
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Any shareholder
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Right of shareholder to inspect and copy books and records - Procedure
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written demand stating documents desire and a proper purpose (related to your interest as an S)
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Types of distribution
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- dividents
- repurchase of S's stock - redemption (forced sale to corp) |
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Who decides about distribution?
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At the board's discretion, no right to distribution until declared.
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Preferred stock
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Preferred means pay first - those shares will be paid first
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Preferred participating
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Participating means pay again, so those shares get paid first, and then they paid again, then the common shares get paid.
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Preferred cumulative shares
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Add them up - ie cumulative dividend adds year after year.
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Funds used for distribution - discussion of 3 types of funds
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- earned surplus
- stated capital - capital surplus |
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Earned surplus
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Generated by business activity - consists of all earnings minus all losses minus distributions previously paid (board may decide to use earned surplus for distribution)
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Stated Capital
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Generated by issuing stock - proceeds from selling stock allocated between stated capital and capital surplus
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Can stated capital be used for distribution?
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NEVER!!!
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At par issuance, the par value goes...
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to stated capital
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Any excess over par at stock issuance
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goes to capital surplus
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How is capital surplus computed?
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Payments in excess of par plus amounts allocated in a no-par issuance
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Can capital surplus be used for distribution?
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YES - if you inform the shareholders
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Modern view regarding distribution
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does not look at funds, it says a corp cannot make a distribution of a corp is insolvent or if distribution would render it insolvent
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What does insolvent mean?
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Corp cannot pay debts when they come due OR
total assets are less than total liabilities (which include preferential liquidation rights) |
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J&S liability for improper distributions
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D's are liable -- but if you relied in good faith re distributions, that is a valid defense
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S's liability for improper distribution
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Liable only if S knew distribution was improper
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Characteristics of fundamental corporate change
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We need:
- board action adopting a resolution of fundamental change - board submits proposal to S's with written notice - must get shareholder approval - delivery of the document to secretary of state |
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How to get S approval?
*** |
Get a majority of shares ENTITLED to vote (not of shares that actually voted) - much tougher standard here
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Dissenting shareholder right of appraisal
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Right of a dissenting S to force the corp to buy your stock at fair value
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Actions by corp to trigger right of appraisal
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- merger or consolidation
- transfer of substantially all the assets not in the ordinary course of business - share exhange |
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Exceptions to right of appraisal
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Right not available if stock listed on national exchange or 2,000 plus shareholders
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Right of appraisal exists in...
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close corporations
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What does S have to do to perfect right of appraisal
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- before vote, file written notice of objection
- abstain or vote against change AND - make written demand and deposit stock |
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Agreement re fair value of stock
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ct will appt appraiser
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Is the right of appraisal the S's only remedy for changes?
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Yes, absent fraud.
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Amendment of the articles
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- board of director actor and notice to S's
- S approval - if approved, deliver amended articles to Secretary of State - are there dissenting shareholder rights of appraisal (NO, not for amendments to articles) |
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Merger requirements
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- board of director action
- S approval (majority of shares entitled to vote) - No shareholder approval required if 90% or more owned sub is merged into a parent corp - surviving corp delivers articles of merger to SoS - Right of appraisal EXISTS here for S's who had right to vote on merger for parent or sub |
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Effect of merger/consolidation
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Parent company succeeds to all the rights and liabilities of constituent liability (aka successor liability)
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Transfer of all or substantially all the assets OR Share exchange
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Requires at least 75% of corp's assets
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Transfer/Share exchange - fundamental change for which corp?
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The SELLER, not the BUYER (avoid getting tricked here)
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Transfer/Share exchange - right of appraisal
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Yes - but only for selling corp
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Transfer/Share exchange - delivery?
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Not required
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Transfer/Share exchange - successor liability?
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No, seller corp still exists, and buyer is not liable UNLESS deal says otherwise or buyer merely continuation of seller
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Dissolution of corp
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Voluntary by Board of Directors - stays in existence to "wind up"
Involuntary |
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Involuntary
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Done by court order, usually at petition of shareholder for:
- D abuse - D deadlock that harms corp - S's have failed at 2 consecutive meetings to fill D vacancies |
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Alternative to petition for involuntary dissolution petition
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Ct ordered buyout (usually buyout)
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Who can seek involuntary dissolution
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S OR
Creditor |
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Dissolution not a moment but a...
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process
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Winding up consists of
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- gather all assets
- convert assets to cash - pay creditors - distribute the remainder to shareholders (pro rata) unless liquidation preference |
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Liquidation preference
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MUST be in the articles
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Insolvency and dissolution
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makes liquidation preferences liabilities
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Debt securities
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Investor lends capital to the corp, to be repaid as specified in the agreement
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What is a debt securities holder relationship to the corp?
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A CREDITOR, NOT and owner
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Bond
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Secured by corporate assets
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Debenture
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Unsecured debt held by investor who lent capital to corp
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Equity securities
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Where investor buys stock -- this person is an OWNER, not a creditor
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Rule 10b-5
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Federal law prohibits fraud or misrep in connection w/ purchase or sale of any security
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Elements of 10b-5
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- deal must use an instrumentality of interstate commerce
- Type of transaction (misrep; insider trading - applies to someone high enough; tipping) - material fact relevant to investment decision - possible P's = SEC, private action by buyer or seller of securities |
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Insider trading
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Applies to someone in corp with a relationship of trust and confidence with S's
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Possible defendants to 10b-5
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- Corp issuing a misleading press release
- buyer or seller of securities who misrep's material info - buyer or seller of securities who trades on material inside info - tipper or tippee |
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Tipper/tippee 10b-5
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Must benefit -- but making gift or enhancing reputation enough of a benefit
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Section 16b
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Aimed at speculation by directors, officers and 10% S's
STRICT LIABILITY |
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When might 16B arise?
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Derivative suit
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When does 16B apply?
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- to a reporting corp (big)
- def must be either D, O, or 10% S - buying and selling stock w/in a single 6 mth period. No fraud or inside info needed |
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Buy/sell requirement for def of 16B
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D/O = at time either of buy or sale
10% S = both at time of buy AND sale |
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What happens when 16b applies
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ALL profits from short swing trading are recoverable: if w/in 6 mths before or after ANY sale, there was a purchase at a lower price, there is profit
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Holy crap
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that sucked
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