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73 Cards in this Set

  • Front
  • Back
Corporation formation requires
3 things
People, paper & act
Formation: the person
Incorporator, may be person or entity
Formation: the paper
1) Articles of incorporation
2) Is a K between S & corporation
3) And is a K between corporation & state
Formation: articles of incorporation requires
4) Requires:
(a) Corporation Name, must include “corporation, company, inc, or ltd.” Abbreviations OK.
(b) Name & address
1. of incorporator
2. Name & address of directors
3. Name & address of registered agent and registered office.
(c) Duration
(d) Purpose: can be “all lawful activity.” Or, specific purpose. But note ultra vires rules.
(e) Capital structure. authorized stock: Max stock, number of shares per class, par value and voting rights per class.
(f) Act. Filing w sectry of state.
5) Creates de jure corporation. failure of incorporation might result in PARTNERSHIP
Legal significance of corporation
1) Internal affairs of corporation are governed by law of state of incorporation.
2) Corporation is separate legal entity. Corporation has most rights and responsibilities, just like an individual. I.e., corporation can be partner in partnership
3) Limited liability. Generally, O&D are not personally liable. Generally S not personally liable.
4) Generally only the corporation is liable for corporate activity.
De facto corporation doctrine
1) De facto corporation. Requires
2) Colorable, good faith attempt at formation and some exercise of corporate privilege.
3) Must be unaware of failure of incorporation.
4) Results in de facto corporation for all purposes except actions by state for excesses of corporate powers.
Corporation by estoppel
1) Corporation by estoppel invoked as a defense against suit by one who acted as if the entity was a corporation.
2) Corporation by estoppel is a K defense.
Amendment and authority of bylaws
1) Shrhlds and D can REPEAL OR AMEND bylaws
2) In case of conflict, articles govern over bylaws.
Liability of Corp & of Promoter for pre-incorporation K
1) Corporation not liable on pre-incorporation K until it ADOPTS the K. Promoter is liable.
2) ADOPTION by express adoption or implied adoption
(a) Adoption implied where corporation accepts benefit of the K
3) Promoter remains liable on pre-incorporation K, even if corporation adopts the K, until NOVATION or, unless K otherwise provides.
Secret profit rule
1) Promoter can’t make secret profit on sale to corporation of prop acquired before becoming Promoter. Profit is price pd by corporation over FMV.
2) Promoter liable to corporation if profit secret from corporation.
Foreign corporation doing business in this state
1) Foreign corporation must be qualified in state, w registered agent for svc of process.
2) If not qualified, can NOT sue, can BE SUED.
Stock Issuance defined
1) Issuance occurs when corporation sells or trades its own stock.
Stock subscription
1) Stock subscription is written offer to buy stock from corporation.
2) Pre-incorporation subscriptions are irrevocable
3) Post-incorporation subscriptions are revocable till acceptance.
4) Acceptance occurs when board accepts the offer to buy.
1) Consideration for stock issued under majority rule may be money, tangible or intangible property, or past services.
2) Traditional rule prohibits future services or promissory notes as consideration for stock. Promissory notes accepted if fully secured.
Modern trend allows payment w any tangible or intangible prop or services benefiting corporation. Broad consideration.
Amount of consideration required for stocks
1) Par value is the minimum issuance price. Par value must be set in articles.
2) Articles may set no par—no min issuance price.
Treasury stock defined
1) Stock that has been issued and then reacquired by corporation.
2) Treasury stock is always no par since par only applies to stock ISSUANCE.
1) Issued Stock sold below par is watered stock
2) D liable if knowledge, purchaser always liable. 3d party transferee not liable if purchase in gd faith.
Pre-emptive rights
1) Right of existing S to maintain percentage ownership whenever new issuance for MONEY
2) Treasury may not be new issuance.
3) Jxn split whether pre-emptive rights must be provided for in articles.
Board of directors Requirements
1) more than 1 natural person
2) elected by S at large or for staggered terms. Classified board is grouped by class of shares.
3) Majority of S can remove D before end of term.
4) Board or S can appt or elect to fill vacancy. S must fill vacancy created by removal.
Board action requires
1) Unanimous written consent to act w/out meeting
2) Or meeting w quorum—at least majority—and voting requirements. Majority or quorum must vote for a resolution to pass.
(a) If neither, then action void unless later ratified
3) Notice required for special mtngs. Waivable.
4) Board action requires independent action. D voting agreements or proxies are void.
Role of directors and committees
1) Role of directors is to manage the business of the corporation.
2) Board may delegate management function to a committee, but committee can’t amendment bylaws, declare dividends or recommend change to corporate structure.
Board of directors
Duty of care
1) Directors must perform in good faith and in the best interests of the corporation, exercising that care a reasonable person would w/r/t to their own business and financial affairs.
(a) Nonfeasance. Breach of duty of care by failure to act. But D liable for breach requires CAUSATION. Must show lost to corporation due to D’s breach.
(b) Misfeasance. Board act that harms the corporation—results in loss. Causation established by showing that Ds act result in harm. But no liability if D meets the business judgment rule.
Business judgment Rule
1) Court will not second guess a business judgment if made in good faith, was informed, and has a rational basis.
D Duty of loyalty requires
1) D owes corporation duty of loyalty. Requires D act in good faith and w reasonable belief that conduct is in corporation’s best interest.
2) BJR does not apply where conflict of interest alleged
D Duty of loyalty: interested Director transaction
1) Where deal between corporation and D.
2) Interested D transaction requires deal was
(a) Fair to corporation when entered or
(b) Disclosure: interest and relevant facts disclosed and deal approved by special quorum (interested D abstain)
D Duty of loyalty: competing ventures
1) D cannot compete directly w corporation.
2) Remedy for competing ventures is constructive trust of profits and damages for harm inflicted.
D Duty of loyalty: corporate opportunity
1) D cannot USURP corporate opportunity. D cannot take corporate opportunity unless first
(a) Informs board
(b) Waits for board to reject the opportunity.
2) Corporate opportunity is anything in corporation’s business line, necessary to the corporation, or something company has interest or expectancy in.
3) Corporation’s inability to pay for opportunity not a defense
4) Remedy requires D to sell to corporation at his cost. If D sells at profit, K gets profit, in constructive trust.
D liability for improper loans
1) Corporation may loan to D if board finds loan is reasonably expected to benefit the corporation.
Extent of D liability
1) D is presumed to have concurred w board action. Unless dissent or abstention noted IN WRITING. Writing must be
(a) In minutes
(b) Writing to corporate secretary at meeting
(c) Registered letter immediately after meeting
2) Dissent after vote in favor are invalid.
Defenses to corporate liability
1) D not liable for Gd faith reliance
2) Book value of assets
3) Opinion of expert not a member of the bd
4) Financial statements prepared by accountant
Duty of officers
1) Officers owe same duty of care and loyalty as D
Required Officers
1) President
2) Secretary
3) And treasurer
4) One person may hold multiple offices.
Indemnification of D&O
Where sued in capacity as D or O and incurred costs, fees, fines or judgment.
1) Corporation barred from indemnification if D or O held liable to corporation or held to have received improper personal benefit.
2) Mandatory indemnification if D or O “wholly successful” on merits or otherwise. Or, indemnification “to the extent” of success.
3) Permissive indemnification, often where settlement.
(a) D or O must show gd faith and with reasonable belief action was in corporation’s best interest
(b) Disinterested D or shares or indep counsel determine eligibility for indemnification. Court may order indemnification.
4) Articles of Incorporation may provide indemnification except where breach of duty, intentional misconduct, or wrongful personal benefit.
S liability
Generally S not liable for acts or debts of corporation.
Piercing corporate veil
1) Piercing corporate veil and holding S liable if
2) S Abused privilege of incorporation and
3) Fairness requires.
4) PCV to avoid fraud or unfairness.
5) Courts more willing to PCV for tort victim than for K claim.
PCV: Alter Ego
1) Alter ego requires commingling personal and corporate funds
2) Fails to respect the separate corporate entity
3) Sloppy admin alone insufficient. But where corporate & personal assets treated as interchangeable, court may PCV under alter ego theory.
PCV: Undercapitalization
1) Court may PCV if corporation undercapitalized when formed.
2) S failed to invest sufficient capital to cover prospective foreseeable liabilities.
Shareholder management: Close corporation
1) Close corporation has few shareholders and stock not publicly traded.
2) A close corporation may be managed by a board of directors or directly by shrhldrs where a UNANIMOUS agreement that provides for S management.
Duties of Shareholder in close corporation w/out board.
1) Shareholders owe each other fiduciary duties.
2) Court may protect interests of minority shareholder in close corporation because no ready public market for minority to sell and get out.
Shareholder derivative suits defined
1) Shareholder sues to enforce corporation’s claim.
2) Usually involves breach of duty of care or loyalty.
3) Recovery to corporation, not individual shareholder
4) S receives costs, fees, from corporation if successful.
5) S may recover directly if corporate recovery would return funds to the wrongdoer. I.e., breach of duty of liability in close corporation. recovery would return to majority sharehldr, here the breaching party.
Requirements for bringing derivative suit:
1) Derivative suit requires
2) Stock ownership when claim arose. Or obtained stock by operation of law—inheritance or divorce.
3) Must adequately represent interests of corporation
4) Must make written demand on D that corporation bring suit on own behalf UNLESS demand would be futile. Futile where Ds are likely Defendants in derivative suit.
5) Must plead w particularity
6) May have to post bond
7) Corporation may move to dismiss if disinterested Ds find suit is not in corps best interest. Note: Committee.
8) Court will scrutinize whether Ds are truly disinterested, court may make independent determination of whether dismissal is in corporation’s best interest.
Settlement of derivative suit
1) Derivative suit cannot be dismissed or settled w/out court approval.
2) Requires notice to affected parties.
Shareholder voting: Proxies
1) Proxy requires
2) Writing fax or email
3) Signed by record shareholder
4) Directed to secretary of corporation
5) Authorizing another to vote the shares.
6) Note: No proxies for D voting. Look whether individual voting as shareholder of D.
7) Proxy good for 11 months unless otherwise indicated.
Irrevocable proxy requires
1) Irrevocable proxy must state irrevocability and
2) Proxy hldr has some interest in the shares other than voting. I.e. pledge as collateral for debt, option to buy.
Shareholder voting trust requirements
1) Voting trust is a LEGAL TRUST. Requires
2) Written trust agreement controlling how shares will be voted
3) Give a copy of trust to corporation
4) Transfer legal title of shares to trustee
5) Original sharhldrs review trust certificates and retain all rights except voting rights.
Shareholder voting agreement requirements
Voting or pooling agreements permitted. Required
1) Agreement in writing
2) In some states agreement not specifically enforceable.
Place of shareholder voting
1) Unanimous written consent of the holders of all voting shares
2) Or a meeting that satisfied quorum and voting rules.
3) Annual meeting required for election of directors. Shareholder can petition court to order annual meeting be held.
4) Special meeting can be called by
(a) Board
(b) President
(c) 10% of voting shares
(d) As provided by articles
(e) Special meeting must be for proper purpose, i.e. sharhlders cannot vote to remove officers. Only Directors.
Notice requirement for sharhldr meeting
1) Notice required to every shareholder entitled to vote notice must state
2) When and where and purpose. Stated purpose in notice is the only valid business at meeting.
3) Failure of proper notice voids all meeting action unless those not notified waive the defect.
Required voting procedures
1) Meeting requires quorum of numbers of shares outstanding, not number of shareholders.
2) If quorum met, majority may act to bind to corporation unless articles or bylaws require more.
3) Majority determined by number of shares voted on the proposal. NOT determined by number of shares represented at the meeting.
Cumulative voting
1) Number of shares held multiplied by number of D being elected
2) All votes may be divided in any manner.
3) Cumulative voting must be specified in articles.
4) i.e., shrhldr w 1000 shares at mtng where 10 directors elected may vote 10K shares on any one D, any combination of Ds.
Stock transfer restrictions
1) Stock transfer restrictions must be
2) Reasonable under the circs, not an undue restraint on alienation. I.e. restriction requires corporation has right of 1st of 1st refusal is valid.
3) Restriction invalid against TRANSFEREE unless
4) Conspicuously noted on certificate or actual knowledge of restriction.
Shareholder right to inspect books
1) Traditional view, must own stock for 6 months and own at least 5% of outstanding shares.
2) Requires written demand stating proper purpose, related to role as shareholder.
3) D has unfettered access to records.
Dividends. Which shareholders get dividends
Distinguish preferred, participating, cumulative and common shares.
1) Preferred shares paid 1st, multiplied by the preference amount.
2) Participating preferred are paid twice: as preferred and as common shares.
3) Cumulative shares accrue dividends for every year since last distribution.
What source of funds for distribution?
1) Distribution from EARNED SURPLUS
2) All earnings minus all losses minus distributions.
3) STATED CAPITAL is generated by issuing stock, not from business activity. Stated capital may never be used for distribution. Stated capital equals par value of issuance. Excess over par value is CAPITAL SURPLUS.
4) If no par issuance, board allocates between capital and capital surplus.
5) Capital surplus may be used for distribution if SHAREHOLDERS INFORMED first.
Fundamental Corporate Change
1) Fundamental Corporate Change requires approval by majority of shares ENTITLED TO VOTE. Not just shares voting on issue.
2) Dissenting sharehldr has right of appraisal. Right to force corporation to buy her shares at fair value. If sharhldr wants out after Fundamental Corporate Change.
3) Dissenting shareholder must
(a) Before vote file notice of objection & intent to demand payment
(b) Abstain or vote against change
(c) After vote make written demand to be bought out.
4) Right of appraisal only in close corporation. In public traded corporation there is a ready market for shares.
Amendment of articles
1) Amendment of articles requires
2) board action and notice to shareholders
3) shareholder approval—majority of voting shares.
4) Filing w secretary of state
5) Remember right of appraisal for dissenting shareholder.
Fundamental Corporate Change: transfer all or substantially all of the assts
duties & liabilities of buyer & seller
1) Transfer all or substantially all of the assts is Fundamental Corporate Change for seller only. All requirements & duties for Fundamental Corporate Change must be met.
2) Corporation acquiring assets is generally not liable for debts of acquired corporation unless otherwise provided or purchaser is merely a continuation of the selling corporation.
3) Seller corporation still exists and is still liable for debts!
Involuntary dissolution
1) Shareholder can petition for Involuntary dissolution based on
(a) Director abuse waste of assets, misconduct
(b) Director deadlock that harms corporation
(c) Shareholder deadlock for 3 annual mtngs to fill vacant board spot.
2) Court may order dissolution or buy out of complaining shareholder.
Liquidation after dissolution process
1) Corporation stays in existence to wind up affairs.
2) Gather all assets
3) Convert to cash
4) Pay off creditors
5) Distribute remainder to shareholders. Shareholder recover pro-rata by share unless dissolution or liquidation preference in articles.
Securities defined
1) Securities are investments. Investor lends capital to the corporation.
2) BONDS are secured by corporate assets
3) DEBENTURES are unsecured.
4) STOCK is equity, and stockholder has ownership interest in corporation. Equity holder is an owner not a creditor.
Put & Call Options Defined
1) Put option is option to sell securities at set price.
2) Call option is an option to buy securities at set price.
Duty of controlling shareholder
Controlling shareholder owes duty to corporation and to minority sharhldrs. Controlling shareholder liable for the following
1) Sale to looters if sale without reasonable investigation. Liable for damages to corporation incldg amount looted and damage to earnings.
2) Disguised sale of corporate assets, where buyer pays a premium to the controlling shareholder in order to acquire corporate assets. Controlling shareholder cannot sell corporate assets unilaterally.
3) Sale of board position. Fiduciary cannot get paid to relinquish board position. Especially where controlling shareholder sells to looter and then Controlling shareholder and allies resign from board.
Common law nondisclosure of “special facts”
1) D&O have affirmative duty to disclose ‘special facts,’ insider information, in securities transaction w shareholder.
2) Special facts are those a reasonable investor would consider important in taking an investment decision.
3) Corporation can sue insider for profits made trading in the market.
Federal Rule
Define & 7 Heading
Federal rule 10b-5 prohibits fraudulent scheme in connection with the purchase or sale of any security. Elements
1) Instrumentality of interstate commerce. Phone, mail, national exchange.
2) Defendant is corporation that issues misleading press release; trader who misrepresents material information or is insider with inside information.
3) Prohibited acts in connection security transaction. I.e. misrepresentation of material information; trading on inside information, or tipping.
4) Materiality. Fact reasonable investor would consider important in making investment decision
5) Scienter. Intent or recklessness to deceive
6) Reliance. Reliance is presumed in nondisclosure or public misrepresentation.
7) Damages difference between price pd and price time after news went public.
Federal Rule
Federal Rule 16B provides recovery by corporation—or derivative suit—of profits gained by insiders buying and selling stock. Elements
1) Reporting corporation. Public corporation listed on national exchange & registered.
2) Proper Def
(a) D&O either at time of buying and selling
(b) Greater than 10% shareholder both at time of buying and selling. Look at ownership immediately before event.
3) Covered transaction
(a) Short swing trading. No fraud or insider information trading required!
4) Equity stock transaction.
Effects of 16b
1) If w/in 6 months, BEFORE OR AFTER ANY SALE, there was a purchase at a lower price, there is a profit.
2) Total profit is sale price minus purchase price. Multiplied by shares sold w/in 6 months period.
3) I.e. sell 700 shares at $6, buy 200 at $1. Profit $5 per share. Total profit is $1000.
Rule statement:
shareholder derivative suit
A shareholder derivative suit against directors on behalf of the corporation requires the shareholder own stock when the claim arose and throughout the litigation, and the shareholder made a demand on the directors to sue, which demand was refused in bad faith or shown to be futile.
Rule Statement:
SEC Rule 16(b)
Rule 16(b) requires that any profit realized by a director officer or 10% shrhldr from any purchase & sale, or sale & purchase, of any equity security of the corp within a period < 6 mnths must be returned to the corp.
An individual is a 10% shrhldr covered by the rule if they own directly or indirectly 10% of any class of stack at the time immediately before both the purchase & sale.
Rule 10b-5 prohibits any person by use of any means or instrumentality of interstate commerce or any national exchange to 1) employ any device, scheme or artifice to defraud, 2) make any untrue statement of a material fact or omit to state a material fact, and 3) engage in any act, practice, or course of business that would operate as a fraud in connection with the purchase or sale of any security.
Where an insider gives a tip of inside information to someone else who trades on the basis of the information, the tipper can be liable under 10b-5 if the tip was made for any improper purpose.
When is distribution permitted.
1) Corporation may make distribution even if it lost money last year. But no distribution if insolvent or distribution would render corporation insolvent.
2) D personally liability for unlawful distributions if aware it was unlawful. D may assert gd faith reliance on financial statement as defense.
Fundamental corporate change 3 types
(a) Merger or consolidation
(b) Transfer of substantially all assets
(c) Transfer of shares in share exchange.