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43 Cards in this Set

  • Front
  • Back
FORMATION REQUIREMENTS

DE JURE CORPORATION
following requirements must be met to be a legal corporation: (Person, Paper, Act)

Incorporators (Person): one or more must sign and file Articles of Incorporation. Incorporator may be person/entity.

Articles of Incorporation (Paper):

K btwn. corporation and SHs; and
K btwn. corporation and state.

Information in articles:
name and addresses (corporate name; incorporators; corporation’s registered agent; initial directors)

statement of duration (most states presume perpetual duration)

statement of purpose
general: “engage in all lawful activity, after first obtaining necessary state agency approval.”

specific: the statement of specific purpose determines the scope of the corporations power (see Ultra Vires).

capital structure (authorized stock; shares per class; par value; voting rights; and preferences)

Acts Required (Act):
1. File Articles with Secretary of State
2. Pay required fee
Organizational Meeting
After filing Articles and paying the fee, BoD holds a meeting in order to select officers, adopt any bylaws, and conduct other appropriate business.

Bylaws: in most states, adoption of bylaws is not a condition precedent to formation. Bylaws are adopted by BoD at the organizational meeting and provide internal governance.

Rule #1: bylaws may be repealed or amended by SHs and, in some states, the board.

Rule #2: if bylaws conflict with Articles, Articles control.
Ultra Vires
An action is ultra vires if it is beyond the scope of the Articles, i.e., it exceeds statement of purpose.

Note: ultra vires contracts are valid.

Remedies:
1. shareholders can seek an injunction to prevent or terminate the act

2. individuals responsible for the act are liable to the corporation for ultra vires losses
LEGAL SIGNIFICANCE OF CORPORATION FORMATION
separate entity: corporation is separate legal person; it can sue and be sued, it can hold property, it can be a partner in a partnership, it can make charitable contributions, it must pay income taxes as an entity, etc.

internal affairs doctrine: the internal affairs of a corporation are governed by the law of the state of incorporation.

limited liability:

officers and directors not personally liable for the actions of the corporate entity.

SHs not personally liable for debts of corporation (only for price of stock) subject to veil piercing.
PIERCING THE CORPORATE VEIL
SHs generally are not personally liable for acts or debts of corporation unless

i. they have abused the privilege of incorporation; and

ii. fairness requires it (to avoid fraud or unfairness).

NOTE: courts are generally more willing to pierce for a tort victim than for a contract claimant.

Piercing Situations:

i. Alter Ego (Identity of Interests): SHs treat corporation and personal assets interchangeably.

ii. Undercapitalization: SHs undercapitalized corporation when formed and corporation causes damage to 3d party (but don’t have enough money to cover prospective liabilities).

iii. Parent Corporation Forms a Subsidiary to Avoid Obligations
SUBSCRIBERS - pre-incorporation contracts
Pre-incorporation written offers to buy stock are irrevocable for 6 months.
PROMOTERS liability
PROMOTERS – Persons acting on behalf of a corporation NOT yet formed

Liability – Corporation becomes liable upon adoption and the promoter remains liable until novation

1. Corporation becomes liable on a promoter's pre-incorporation contract when the corporation Adopts the contract by

Express Resolution of the Board of Directors in writing

Ratification – Implied adoption through knowledge of the contract and acceptance of its benefits

Promoter remains liable until there has been a novation.

Novation – an agreement between the promoter, the corporation, and the third party that the corporation will replace the promoter under the contract

Note – If the corporation never forms, Promoter alone remains liable.

Reimbursement – May have a right of reimbursement by the corporation for benefits received.
PROMOTERS as Fiduciaries
Promoters owe a duty of loyalty to each other and the corporation.

Loyalty – the promoter cannot engage in self dealing, usurping corporate opportunities, or make a secret profits on their dealings with the corporation

Sale to the Corporation of Property Acquired:

BEFORE becoming a promoter – profit recoverable by corporation ONLY if sold for more than fair market value

AFTER becoming a promoter – ANY profit is recoverable by the corporation.

Remedy – May disgorge profits and sue for losses.
De Facto Corporation Doctrine
A business failing to achieve de jure corporate status nonetheless is treated as a corporation, if:

i. Organizers have made a good faith, colorable attempt to comply with corporate formalities, AND

ii. Have NO knowledge of the lack of corporate status.
Corporation by Estoppel
Applies in Contracts to prevent a corporate entity and parties who have dealt with the entity as if it were a corporation, from backing out of their contracts.

Note – this exception only applies to contracts and NOT to torts.
Legal Significance of Formation (2 key points)
Separate Legal Entity – Corporation becomes separate legal entity

Limited Liability –Shareholders are NOT personally liable for debts and obligations of the corporation except for the price of his stock.
Foreign Corporations
A corporation incorporated outside the state that wishes to engage in a regular intrastate business must qualify by filing a Certificate of Authority with the Secretary of State that includes ALL of the information required in the Articles of Incorporation.
Issuance of Stock - Consideration
Consideration – What must the corporation receive when issuing stock

Par value – Minimum issuance price. May never receive Less than par value.

Acquiring Property with par value stock – Any valid consideration may be received if the Board values the consideration in good faith to be worth at least par value.

No Par Value – NO minimum issuance price.

May be sold for any valid consideration deemed adequate by the Board.

Treasury Stock – Previously issued stock that has been reacquired by the corporation.

May be sold for any valid consideration deemed adequate by the Board.

Consequences of Issuing Par Stock for Less than Par Value (Below par issuance)

Directors are liable personally. (i.e. No authority to issue)

Shareholders are liable for paying full consideration for his shares.
Statutory Requirements for Directors
Corporation must have a Board with at least ONE member

Shareholders elect directors

Shareholders can remove a director before her term expires with or without cause.
Valid BOD Meeting
To execute action the board must call a meeting and pass a resolution.

Meeting Required – Unless ALL directors consent in writing to act without a meeting, a meeting is required

Notice – Notice of directors' meeting can be set in bylaws

Directors Must Vote in Person – Proxies are not allowed. Also, no voting agreements. But conference calls now generally valid

Quorum – To take action you must have a majority of ALL directors present

Unless a different percentage is required in bylaws

Vote – To pass a resolution, all that is required is a majority vote of those directors present.

Hypo – 9 directors, need 5 for quorum, and 3 votes to pass a resolution.
LIABILITY of DIRECTORS (to the Corporation and Shareholders)
Duty to Manage – Directors have a duty to manage the corporation

Delegation – Directors may delegate management functions to a committee of one or more directors that recommends action to the Board.

Note – Shareholders have no power to manager but they elect directors.
Business Judgment Rule – Directors
Directors are protected from liability by the BJR.

BJR – a presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders

i.e. Directors will not be liable for innocent mistakes of business judgment.
Directors as Fiduciaries
Directors fiduciaries who owe the corporation duties of care and loyalty

Duty of CARE – (Prudence) – Duty to act with the care that a prudent person would use with regard to her own business, unless the Articles of Incorporation have limited director liability for a breach of the duty of care.

i.e. Directors who study thoroughly or have personal knowledge are not liable. Directors who don’t attend meetings or study are liable.

Duty of LOYALTY – A director may NOT receive an unfair benefit to the detriment of the corporation or its shareholders, unless there has been a material disclosure and independent ratification.

Self-Dealing – director who receives an unfair benefit to herself (or her relative, or another one of her businesses) in a transaction with her own corporation.

Usurping Corporate Opportunities – director receives an unfair benefit by usurping for herself an opportunity which the corporation would have pursued. Must first give notice to the corporation and allow the corporation a chance to pursue it.

If no opportunity was presented to the corporation they can disgorge profits.

Ratification – Independent directors may ratify an unfair benefit with a material disclosure AND ratification by:

i. Majority vote of independent directors
ii. Majority vote of a committee of at least 2 independent directors
iii. Majority vote of by independent Shareholders

Result – If there is no disclosure the transaction can be set aside unless it is fair to the corporation.
OFFICERS
OFFICERS - Owe same duties of care and loyalty

1. Agents – Officers are agents of the corporation and bind the corporation by their authorized activities

2. Necessary Officers – Corporations must have a President, Secretary,& Treasurer

3. Select and Remove – Directors have virtually unlimited power to select officers, and may remove officers from office at any time.

But Note – the corporation may be liable for breach of contract damages
INDEMNIFICATION of Directors and Officers
Director or Officers that have incurred costs, attorneys fees, fines, a judgment or settlement in the course of corporate business, may seek indemnity from the corporation.

The corporation may NEVER indemnify a director who is held liable to their own corporation in the lawsuit.

The corporation MUST ALWAYS indemnify if a director or officer wins a lawsuit against any party, including their corporation.

The corporation MAY indemnify directors or officers if:

i. Liability is incurred to third-parties (judgment or settlement), AND

ii. Director or officer shows that she acted in good faith and that she believed her conduct was in the corporation's best interest

Who may determine whether to grant Permissive Indemnity

i. Majority vote of independent directors.

ii. Majority vote of committee of at least two independent directors

iii. Majority vote of shares held by independent shareholders

iv. Special legal counsel opinion can recommend
OFFICERS Authority
Authority: as agents of the corporation, officers can bind the corporations provided they had authority to do so—

actual express: provided for in Articles or bylaws, or by Board action.

actual implied: authority by virtue of the office held.

apparent: corporation holds officer out as having the authority to bind it and a third-party relies on this representation.
Business Judgment Rule:
a director does not breach the standard of care by making a harmful business decision if it was made in good faith, was informed and had a rational basis.

Also note: in discharging her duties, a director may rely on information given to her provided she has a reasonable, good faith belief in the competence of the person providing the information.
Rights of SHAREHOLDERS
Shareholder Direct Suits – For a breach of fiduciary duty owed to the shareholder

Shareholder Derivative Suits – In a derivative suit, a shareholder is suing to enforce the Corporation's cause of action

Requirements – for bringing a shareholder derivative suit

1. Contemporaneous stock ownership gives standing for suit

Must own at least one share of stock:

When the claim arose, and

Throughout every stage of litigation.

Demand – Must generally make demand on directors to bring suit.

Demand must be:

Made and rejected by the Board OR

At least 90 days pass since demand was made
Shareholder voting
Right to vote – Only the record date owner has the right to vote

Record Date Owner – the owner of the stock at the voter eligibility cut-off date set by the board within 70 days of the meeting date.

Proxies
1. Requirements: (5) (Writing, Signed, Sent, Authorizing, within 11 months)
a. Writing (fax or email generally valid)
b. Signed by record shareholder
c. Sent to secretary of corporation
d. Authorizing another to vote the shares
e. Valid for only 11 months

Revocable – Proxies are freely revocable unless:

It states that the proxy is irrevocable, AND

It must be coupled with an interest

i.e. authorize a proxy to vote the shares with a sale in the interest of the shares to the proxy.
Meetings / Notice
Annual Meeting – Corporation must have a properly noticed annual meeting

Notice – Notified of the meeting not less than 10 or more than 60 days before the meeting. Notice must contain the time and place of the meeting.

One Board Opening – Must have at least one Board slot open for election at the annual meeting

Specially Noticed Special Meeting – Called by the Board, the President, or 10% of the voting shares

Vote only on a proposal or fundamental corporate change

Notice – must also contain the meetings special purpose.

Note – Nothing else can take place at the meeting otherwise it will be void
Meetings Quorum
Quorum – A quorum requires a majority of outstanding SHARES to be present when the meeting begins, unless otherwise provided in Article. (i.e. # of shareholders is irrelevant)

Vote – If quorum is present, action is approved if the votes cast in favor of the proposal exceed the votes cast against the proposal. (Ex: 80k quorum. 50k vote. 25,001 to pass)
Cumulative Voting for Directors
Minorities ability to elect at least one director.

Generally – 1 vote for 1 share

Cumulative Voting – Multiply the number of shares by the number of directors to be elected.

Rule – Presumption that there is NO right to cumulative voting unless the right is granted in the Articles.
Closely-Held Corporation
Shareholder Agreements to Eliminate Corporate Formalities

Requirements:

1. Unanimous Shareholder Election in the Articles, By-laws, or in a Filed Written Agreement

2. Reasonable Share Transfer Restriction (i.e. No public trading or similar)

Benefits:
1. NO piercing of the corporate veil even if you fail to maintain formalities

2. Possible Sub-chapter S corporation status

Benefit of S Corp.– Treated as a partnership for tax purposes

Requirements to become an S Corp.

i. No more than 100 Shareholders, who are individuals and American residents

ii. No more than ONE class of stock
Professional Corporations
Licensed Professionals (lawyers, accountants, medical) may incorporate as Professional Corporation (PC)

Requirements
1. Organizers file Articles with name designated as "PC"

2. Shareholders must be licensed professionals

3. Corporation may practice only ONE designated profession

4. Professionals are liable personally for their OWN malpractice

5. Professionals are NOT liable for each other's malpractice OR the obligations of the corporation itself.
Controlling Shareholders
Owe a fiduciary duty to minority shareholders, AND

Liable for selling the corporation to a party who loots the corporation, unless reasonable measures were taken to investigate the buyer’s reputation and plans for the corporation.
Fundamental Corporate Changes
Recognized Fundamental Corporate Changes (MACSD)

i. Merger (A becomes B)

ii. Amendment of the Articles in a fundamental way. (NOT ministerial)

iii. Consolidation (A and B become C)

iv. Sale (not purchase) of Substantially all of the Corporation's Assets

v. Dissolution (A dissolves)
Fundamental Corporate Changes

Procedural Steps (5 steps)
i. Resolution – Resolution by Board at a Valid meeting

ii. Notice – Notice of a Special Meeting

iii. Approval – Approval by:

1. Majority of ALL shares entitled to vote, AND

2. Majority of any voting group adversely affected by the change separately

Ex: If amending Articles to eliminate Class A stock - requires majority of all shares and a majority of the Class A stock separately

3. Short Form Merger Exception – No shareholder approval is required for "short-form" merger where a parent corporation that owns 90% or more of the stock in its subsidiary merges with the subsidiary.

iv. File Notice with the State (i.e., Articles of Merger)

v. Dissenters Appraisal Remedy – Shareholder who does not vote for a fundamental change has the right to force the corporation to buy their shares back at fair market value

Actions to Perfect the Right

a. Written Notice – Before Shareholders vote, file written notice of objection and intent to demand payment

b. Adverse Vote – Do not vote in favor of the proposed change

c. Written Demand – Make prompt written demand to be bought out

Appoint Expert Appraiser – If shareholder and corporation cannot agree on a fair value, court has the power to appoint an expert appraiser to value the shares and that appraisal will be binding on the parties
Anti-Fraud - Section 10(b) of the Securities Exchange Act of 1934
i. Scienter - intent to deceive.
ii. Deception

Liar – Material misrepresentation or failure to disclose a material fact in breach of a fiduciary duty, OR

Silence absent a duty to speak is not a material misrepresentation.

Only need to speak when the periodic disclosure is required.

Insider Trading – trading on or tipping inside information

Misappropriator – One who misappropriates (i.e. steals, converts) material nonpublic information and uses it to purchase or sell securities.

Tipper – One who tips inside information for person benefit to another who trades on it, OR

Tipee – One who receives inside information and trades on it with knowledge that the information was disclosed in breach of the tipper’s fiduciary duty.

In connection with the actual Purchase or Sale of securities

Would have, Should have, or could have sold the stock is NOT good enough.

Reliance – Investor actually relied on fraud, or invested at a price infected by fraud.

Causation – Fraud caused their economic losses
Section 16(b) - Short-Swing Trading Profits

When does 16(b) apply
When does 16(b) apply

1. Reporting Corporations

Listed on a national exchange, OR

At least 500 shareholders AND $10 million in assets

2. Qualified Defendant – Officer, director, of Shareholder with more than 10%

3. Short-Swing Trading – NO buying and selling stock within a single SIX-month period

NOTE – FRAUD OR INSIDE TRADING IS NOT REQUIRED.

Absolute liability – All "profits" from such "short-swing trading" are recoverable by the corporation.

Profits – May either be a gain within 6 months after a purchase or a loss within 6 months after a sale.
Sarbanes-Oxley Act of 2002 –
Cannot knowingly make false filings AND cannot benefit during false hoods or black-out periods.

Reporting Corporations

1. Listed on a national exchange, OR

2. At least 500 shareholders AND $10 million in assets

Certify – CEO & CFO must certify that based on the Officer's Knowledge, the reports filed with SEC:

Do not contain material misrepresentations or omissions, and

Fairly present the financial position of the company

Result – Willfully certifying a false report could bring:

1. $5 million fine, and
2. 20 years in prison

False Hoods – If false reports have to be restated, the Corporation (directly or derivatively) may recover:

Officers' Profits made from trading the company's securities within 12 months after the false reports were filed, AND

Officers’ incentive-based compensation received during that period.

Black-Out – Corporations (directly or derivatively) may also recover ANY profits made by Officers from trading corporation's stock during "black out" periods of at least 3 days when at least 50% of the employees are prohibited from trading in their retirement plan's securities.
B. STATE LAW LIABILITIES/LIMITATIONS FOR CONTROLLING SH
SALE OF CONTROLLING SHAREHOLDER’S INTEREST
Control Premium: a controlling shareholder may sell her stock for more than its mere ownership value (extra = “control premium”) unless there is some other factor involved (imposing DUTIES on the controlling SH)—

sale to looters: controlling shareholder is liable if she sells to looters without making a reasonable investigation.

disguised sale of corporate asset: buyer pays a premium to the controlling shareholder so she can get her hands on an asset of the corporation. Controlling shareholder has no right to sale a corporate asset – all shareholders should share in the premium.

sale of board position: fiduciary cannot get paid to relinquish her position. It is alright for the new controlling shareholder to elect new directors.
OPPRESSION OF MINORITY SHAREHOLDERS
Courts may protect minority shareholder, particularly in a closely-held corporation, because there is no public market for the stock, so a disgruntled minority shareholder cannot simply sell her shares.

Causes of Action:

Fraud/Misrepresentation: common law fraud may apply to misrepresentations in the sale of stock.

Nondisclosure of Special Facts (Common Law Insider Trading):

Duty: many courts impose upon directors/officers an affirmative duty to disclose special facts in a securities transaction with a shareholder (or maybe a non-shareholder).

“special facts” = those a reasonable investor would consider important in making an investment decision.

Standing: shareholder with whom the insider deals.

Recovery: difference btwn. price paid and the value of the stock a reasonable time after public disclosure.

Market Trading on Insider Information:

In some states, corporation can sue the insider to recover profits she made in market trading on insider information.
RULE 10B-5

Elements:
1. fraudulent conduct: defendant engaged in some fraudulent conduct (e.g., misrepresentation; nondisclosure; tipping).

materiality: misrepresentation or omission of a fact that a reasonable investor would consider important in making an investment decision.

scienter: defendant must have an intent to deceive, manipulate or defraud or be reckless.

2. connection w/ purchase or sale of a security: fraudulent act is in connection with the purchase or sale of a security by plaintiff (includes debt or equity securities)

3. employment of an instrumentality of interstate commerce (telephone, mail)

4. reliance: reliance is a separate element, but is presumed in cases of nondisclosure and public misrepresentation.

5. damages: plaintiff must show that the defendant’s fraud caused the plaintiff damages
TIPPER:
a person is a tipper if she—

passes inside information in breach of a duty not to use inside information for personal benefit; and

benefits from the tipping (making a gift or enhancing reputation is sufficient).
TIPPEE: a person is a tippee if she—
traded on the tip; and

knew or should have known that the information was improperly passed.
Misappropriation Theory
government can prosecute under rule 10b-5 for trading on market information in breach of a duty of trust and confidence owed to the source of the information; the duty need not be owed to the issuer or shareholders of the issuer.
DERIVATIVE SUITS
Elements: to bring derivative suit—

i. stock ownership when claim arose

SH bringing suit must have—

owned the stock at time claim arose; or

got stock by “operation of law” from someone who did own the stock when claim arose (e.g., inheritance, divorce decree)

adequate representation of the corporation’s interest

written demand on directors: SH must demand that corp. bring suit unless demand would be futile

plead with particularity.

corp. is joined (initially) as a defendant

In some states: SH required to post bond for costs (to avoid strike suits)

Dismissal

Corporation may move to dismiss derivative suit if disinterested directors find it is not in corporation’s best interest (low chance of success; cost of litigation > recovery)

1. court can scrutinize whether directors moving to dismiss are truly disinterested

Settlement

A derivative suit cannot be dismissed or settled without court approval (similar to a class action).

Consequences

If Successful…
1. Recovery goes to the corporation

Exception: court may allow shareholder to recover directly if a recovery by the corporation would return money to the wrongdoers (e.g., closely-held corporation).

2. SH is reimbursed by corporation for costs and attorneys’ fees

If Unsuccessful…

1. Shareholder cannot recover costs and attorneys fees

2. Shareholder is liable to defendant for costs and attorneys’ fees if SH sued without reasonable cause.

3. Res judicata: other shareholders cannot later sue the same defendant on the same transaction (b/c it’s the corp’s claim, not the shareholders).
Limitations on Distribution of Dividends:
Rule: a corporation cannot make distributions if—

1. it is insolvent; or

2. the distribution would render it insolvent.

Def: a corporation is insolvent if it is unable to pay debts as they come due.

Unlawful Distributions:

Liability for unlawful distributions:

directors: personally liable

shareholders: if they knew the distribution was unlawful when they received it.