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64 Cards in this Set
- Front
- Back
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3 Advantages of Incorporation:
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1.) Limited Liability
2.) Perpetual Existence 3.) Ease of Transference |
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What 4 Powers Does the NC Business Corporation Act Grant?
SALA |
1.) Power to sue and be sued
2.) Acquire and Dispose of Property 3.) Lend money for corporate purposes 4.) Any power necessary to accomplish its purposes |
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What are the 5 things do the Articles of Incorporation contain?
NPLSN |
1.) Name of the Company (name cannot be deceptively similar to a Corporation already in existence.)
2.) The purpose of the corporation - Why? You don’t want to operate “Ultra Vires”, meaning outside the scope of the power set forth in the articles of incorporation. In the document in question, it should state “or conduct any lawful business.” This can save you those headaches. 3.) How long the corporation will last - “Organized in perpetuity - should be in the language 4.) Capitol stock structure of the company - -How many classes of stock? -The rights of the voters holding each share -State the amounts of shares authorized to be issued, and the par value of that stock. *Significance of par value: Allocating the capital in each account. The corporation may not sell the stock for less than par. If they sell the stock for less than par, then they have “Watered Stock”. 5.) The names and mailing address of people who will serve on the board of directors |
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What 3 things must happen for a valid, De Jure Corporation to form?
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1.) File articles of Incorporation with SoS.
2.) Receipt Cert of Incorporation from Sos. 3.) File it with the local record keeper (Register of Deeds, etc.) |
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What do you need for a De Facto corporation?
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1.) Good faith attempt to incorporate
2.) Act like a corporation (eg - do business in the name of the corporation, open checking accounts in the name of the corporation, etc.) |
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What are 3 Theories for Piercing the Corporate Veil?
AEIF |
Theory #1.) Alter Ego
Theory #2) Inadequate Capitalization Theory #3) Fraud: |
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What are 2 types of financing?
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1.) Equity Financing
2.) Debt Financing |
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What are the 2 types of Bonds?
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1.) Mortgage Bonds
2.) Debenture Bonds |
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What are the four sub-types of these bonds? RC3
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a.) Registered Bond -- The bond is registered in the name of a person or corporation, and is payable only the registered bondholder
b.) Coupon Bonds (Bearer Bonds) -- No one keeps record of the holder of these bonds. Payer to the person holding them. Haven’t been able to issue coupon bonds in nearly 20 years. c.) Convertible Bonds --- Under the corporate indenture, at any time maturing, the holder may convert the bond into a pre-determined number of shares of stock. d. Callable(Redeemable) Bonds: The corporation can chose to pay off the bond early. This will usually pay a higher interest rate. |
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Do you have the right to vote if you own stock?
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Refer to the Articles of Incorporation for voting rights.
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If a company makes a profit, do you have the right to demand a dividend?
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NO.
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What does a Promoter do?
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Starts up lines of credit, signs agreements, etc... for a company before it comes into being as a corporate entity. He primes the pump, so the company can get off to a fast start when it comes into being.
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What is a subscription agreement?
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A one sided, stock purchase contract for a corporation that has yet to come into being.
They are irrevocable by the offerors for 6 mos. |
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Do you have to sell stock to the offerors in a subscription agreement?
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No. It is not a contract.
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What 3 things can we exchange stock for?
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1.) Cash.
2.) Property 3.) Services already performed. |
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What are the 2 things we cannot exchange stock for?
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1.) For a promise to pay at a later date
2.) For services not yet rendered |
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Diluted Stock: Give an example---
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--XYZ Corporation on Monday sells 10,000 shares of No Par stock to Kim for $50
--on Tuesday, XYZ sells 10,000 shares of No Par stock to Avery for $10 --if there is a legitimate reason for that much of a difference in the price, then the discount of the stock is justified --if there is no reason to justify the discount, then you have Diluted Stock – Kim’s stock was diluted --if the company liquidated, then you would have 20,000 shares of stock ----- Kim paid $500,000 and Avery paid $100,000 ------- when the stock was distributed, it would be worth $30 a share |
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Who is liable for for the amount of the diluted stock?
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The members of board XYZ, if a reason is not given.
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Watered Stock: Give an example=
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XYZ Corp issues 10,000 shares to Bill Smith for $30K.
Par value is 10,000 a share. You now have $70K in water. |
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Who is liable for watered stock?
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The buyer of the stock, and board members.
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If the original purchaser of watered stock sells to Adam, is Adam now liable? Can he keep the stock?
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He's fine, as long as he didn't know he was buying watered stock when he purchased it.
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Does Watered Stock liability apply to NYSE transactions?
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No. Why? Because Watered Stock liability is only applicable to primary market transactions.
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Are you more likely to have a watered stock problem if exchanged for cash, or for property or services? Why?
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Are you more likely to have a watered stock problem if exchanged for cash, or for property or services?
Property. It’s hard to ascertain how much property is worth. |
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If the dispute goes to court, who will the court usually defer to?
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The board.
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If the judgment goes against the board in the case of a Watered Stock liability, what will have to happen, in the case of Bill, mentioned earlier?
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The Board and Bill will pay the $70K of "water", back to the company.
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Can the company change what they charge for shares over time?
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Yes.
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During the 1929, before the crash, there was no...
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right to financial data requests.
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Under the Securities Exchange Act of 1934, what must happen?
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If a company wants to issue stocks or bonds, they must register the instance with the SEC, and issue financial info.
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What are the 2 exceptions where you do not have to register with the SEC?
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1.) Intrastate offerings: only offering stock or bonds within their own state.
2.) Non-public offering - Offering stock or bonds to a small, distinct group of people. What comprises a small, distinct group of people? 20 people, A classroom. There is no dollar limit to the offering. |
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If you do not have to register with the SEC, who do you have to register with, and under what laws?
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a. The State
b. BLUE SKY LAWS |
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Who do Promoters owe the Duty of Loyalty to?
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Their fellow promoters and investors.
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A problem arises for a promoter if...
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they take a secret profit.
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Tests for if Ben has violated the Duty of Loyalty?
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Ben (the promoter) owns a 10 acre tract of land. The promoter paid $100,000 for the tract of land. The corporation comes into being (XYZ Corp.). Ben sells the land to XYZ for $140,000.
1.) Has Ben made a profit? If he bought the land before he became a promoter, then NO! 2.) If Ben reveals the fact that he bought the land to the board, tells them what he paid for it. and when he bought it, then he’s fine. If Ben fails these tests, and has taken a secret profit, then the board can sue for the return and restitution of the $40,000 secret profit |
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How is promoter liability treated in 3 separate instances?
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1.) Contract states that “Ben is liable”. If the contract states this, then W can sue the promoter.
Can W sue the XYZ Corp.? Only if the Corporation ADOPTS the contract, after it has come into being. There was no XYZ when Ben signed the contract. They may adopt, but they do not have to. 2.) The Contract is silent. Then the implication is that Ben is still liable. 3.) Contract states that Ben is not liable. Then this is not a contract at all, because Ben has no duty to perform. |
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Is there a way that a Promoter can be excused from liability?
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Yes. Through a NOVATION.
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What has to happen for a NOVATION to take place?
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1.) The Corporation has adopted the contract.
2.) The third party (e.g. Witherspoon) has specifically excused the promoter for liability. |
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Why would a third-party be hesitant/stupid to grant a NOVATION?
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He wants to be able to sue as many parties as possible, in the event of a breach. XYZ is a De Jure corporation, with no assets that are currently able to go against, in the event of a default.
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What does a proxy do? Who votes the proxy?
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The proxy allows you to indicate how you want the item voted. A designated member of the board will receive, and vote the proxy. (Proxy Holders.)
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What is a problem with voting by proxy?
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The proxyholder retains the right to vote the stock as he sees fit.
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Will a fiduciary ever vote by proxy?
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NO.
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What do you do, if you want only a certain item voted, and want it voted how you choose?
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Strike the language, and write "limited proxy" in its stead.
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Give an example for a proxy fight?
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Example:
Nate gets notice of the meeting. He goes to Ford and asks for the name and addresses of all legal title holders of the stock. Why? He wants to wage a proxy fight. Nate can send out his recommendations and a second proxy to all shareholders. |
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What is the rule/why do most states make you use a cumulative voting method when choosing a board of directors?
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By law, you cannot change the composition of the board, if it will hurt the minority shareholders.
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What is a voting trust?
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legal title to the stock is held by a trustee.
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Under what 3 circumstances would stockholders have a legal right to look at the books and records of a company?
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1.) Own at least 5% of the stock.
2.) They have held any stock for at least 6 months. 3.) They have the best interest of the Corporation in mind. |
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Give an example under which the board of a company could legally deny a stockholder who was otherwise qualified, the privilege of looking at the books of the company?
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Ben is a Peacenik. He buys some Georgia Pacific stock, waits 6 months, and then asks to see the books of the company.
Will the company be able to deny Ben’s request? Maybe, on the grounds that Ben does not have the best interests of the company at heart. |
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Give an example under which a stockholder could file a DERIVATIVE suit...
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-XYZ Inc. has 5 people on their board (A,B,C,D,E)
--XYZ has contracted to sell ABC 100,000 calculators for $1M --the calculators were delivered but were not paid for by ABC --XYZ would bring suit against ABC, but they don’t sue for some reason The stockholder can then sue. |
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What must a stockholder do, before filing a derivative suit?
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--the 1 requirement is the Evert must make a proper demand: must go to the Board and demand the suit be filed, but they still don’t file suit – Evert now has the right to sue for the $100,000
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If a stockholder wins, in a derivative suit, who gets the money?
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The company/corporation.
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Is Evert entitled to be reimbursed for going to Court?
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Yes. Win or lose, the corporation must reimburse legal expenses.
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What is the ONE EXCEPTION where a stockholder would not be entitled to reimbursement for a DERIVATIVE SUIT?
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The court holds that no reasonable person would bring the suit to begin with. (e.g. Suing for $1 dollar.)
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What 3 REQUIREMENTS must be met, before a Corporation can pay a dividend?
SAS |
(a) the corporation must be Solvent
(b) payment can not violate the Articles of Incorporation (c) the corporation must have the appropriate amount of surplus – Stated Capital (the Par value of stock issued), Paid in Surplus (anything the company receives for stock over and above Par),Earned Surplus (Retained Earnings, profits generated in the company and left in the company not being paid out as dividends) |
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3 places you may or may not pay a dividend from?
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(d) a common stock cash dividend can only be paid out of Earned Surplus
(e) a preferred stock cash dividend out of Earned Surplus or Paid in Surplus (f) you can never pay a dividend out of Stated Capital |
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What are the 2 Duties of the Board of Directors?
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1.) The Duty to use reasonable care.
2.) Loyalty |
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What constitutes a Conflict of Interest/Interested Director, in the case of a Board?
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a.) A director who can profit
b.) A director under the control of a director who can make a profit. c.) A director who serves on both boards. |
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What 3 ways can you rebutt the case of a director who serves on both boards having a Conflict of Interest?
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1.) They can rebutt by taking a vote of the disinterested parties
2.) By taking a vote from the stockholders -Only stock owned by disinterested parties can be voted. 3.) They can prove a reasonable contract. |
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The Corporate Opportunity Doctrine - An Example:
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Karen is on the board of Steve Madden.
Karen has an opportunity to buy $10,000 worth of shoes from a great shop in China. Can she buy the shoes and make a profit? No. Why? Steve Madden has a legitimate corporate expectancy with regard to this transaction. What about Calculators? No worries there. Steve Madden does not sell calculators, and so therefore, no legitimate corporate expectations. The shoes must first be offered to the board. If the board refuses, she may then purchase the shoes, free and clear. |
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In the case of the Corporate Opportunity Doctrine, what must the interested party do with the merchandise, if there is a LEGITIMATE CORPORATE EXPECTANCY?
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Offer the goods to the board. If the board refuses, the board member is in the clear.
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What determines whether you take a tender offer for the buyout of your corporation?
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The INTRINSIC VALUE of the company, per share, as whole.
This is regardless of whether or not the tender offer is higher than the current market price. |
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What 2 things does RULE 10-5 B state?
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1.) You can’t employ a device to scheme and defraud
2.) You can’t make an untrue statement of a material fact about a security, stocks, and bonds |
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If a seller of bonds makes a misstatement about a bond that was sold, who will bring suit?
Who will be the defendant? |
a. A stock or bondholder.
b. An officer or director of the company. |
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What is also a violation of Rule 10-5 B?
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Insider Trading.
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In the case of Insider Trading, in what case is the person who bought the stock liable?
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If they knew they had Insider information, upon the purchase of the stock.
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Give an example of STOCK RECAPITALIZATION:
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Father to daughter ---he keeps preferred, voting stock, and gives her common stock. Her stock is worth nothing, so far as the government is concerned. When he dies he will leave the voting, preferred to her.
By gifting the common stock, he froze the value of the company. Summary of partnership/corporate entities |
