Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
93 Cards in this Set
- Front
- Back
- 3rd side (hint)
Formation Requirements
|
People, papers, Act
|
|
|
People: Incorporators
|
Must have one or more; may be person or entity
1) Execute the articles and supplemental form 2) Deliver them to the state secretary 3) Might hold an organizational meeting |
|
|
Formation Papers
|
1. Articles of Organization:
- Corporate name must include "corporation, incorporated, limited, company" - Name/address of each incorporator - Information regarding stock (authorized stock, # of shares/class, voting rights/pref/limitations of each class) 2. Supplemental Form: - Name of initial registered agent/address of registered office - Names/addresses of initial directors, president, treasurer, and secretary - Dates for the initial fiscal year |
|
|
Authorized Stock
|
Maximum shares the corporation can sell
|
|
|
Issued stock
|
Number of shares the corporation actually does sell
|
|
|
Outstanding stock
|
Number of shares the corporation sold and has not reaquired
|
|
|
Registered Agent
|
Agent for service of process on the corporation, must have business office address, can be individual/corporation qualified to do business in Mass
|
|
|
Statement of Duration
|
not necessary, presume perpetual
|
|
|
Statement of the purpose
|
not necessary, presume all lawful activities
|
|
|
Ultra Vires
|
Beyond scope of the articles, today:
1) Ultra vires contracts are valid; 2) Shareholders may seek injunction; 3) Responsible managers are liable to corporation fro ultra vires losses |
|
|
Formation Act
|
1. Deliver the articles and supplemental form to the Massachusetts state secretary and pay required fee
2. Board of directors (or incorporators, additionally elect directors) holds organizational meeting, where: - Adopt bylaws - Elect President, treasurer, secretary - Can transact other business If in compliance, Secretary files Articles which is conclusive proof of valid formation - De Jure Corporation |
|
|
Internal Affairs of Massachusetts Corporation
|
BCA (Business Corporation Act) governs internal affairs even if no business done in Massachusetts
|
|
|
S-Corporation
|
100 or fewer shareholders, all shareholders are human U.S. citizens or residents, there is only one class of stock, not publicly traded.
"S" refers to form of tax code, avoids income tax at entity level |
|
|
Double Taxation
|
Income tas is paid by the entity and by the shareholders on their dividends
Avoid through S-Corp |
|
|
Charitable Contributions
|
Corporations may make charitable contributions without statutory ceiling, though as to be reasonable or shareholders will be ******
|
|
|
Corporate Liability
|
Directors, officers, shareholders are not liable for breaches of contract or torts by corporation, even if one shareholder
Shareholders liable only for price of their stock |
|
|
De Facto Corporation Doctrine
|
Proprietors have failed to form a de jure corporation; may avoid liability if:
- Relevant incorp statute (BCA satisfies every time) - Parties made a good faith, colorable attempt to comply with it; AND - Acting like there is a corporation Must be unaware of the failure to form a de jure corporation If applicable, held to be Corporation for all purposes except state Quo Warranto action |
|
|
Corporation by Estoppel
|
Applies only in contract cases
One who treats a business as a corporation my be estopped from denying that it is a corporation |
Must be unaware of the failure to form a de jure corporation
|
|
By-Laws
|
Non necessary, internal governance, adopted by board or incorporators at organizational meeting, Shareholders may repeal/amend, Directers may repeal/amend only if articles/bylaws allow
|
Articles control when conflict with by-laws
|
|
Pre-Incorporation Contracts
|
Promoter is a person acting on behalf of a corporation not yet formed; enters K on behalf of corporation-not-yet-formed; liable until NOVATION
Corporation is not liable on pre-incorporation contracts until it adopts the contract |
Express - board action
Implied - if corporation knowingly accepts a benefit of the contract Adoption does not relieve promoter of liability |
|
Secret Profit Rule
|
Promoter cannot make a secret profit on her dealings with the corporation
Sale to corp of property ...before becoming promoter: (price paid by corp) - (FMV) ...after becoming promoter: (price paid by corp) - (price paid by promoter) |
|
|
Foreign Corporations
|
Must qualify:
Any corporation incorporated outside Massachusetts "Doing Business" means regular course of intrastate business activity (owning/leasing/construction/performance of labor) Qualify by: - Paying fee - Maintain registered agent/office in Mass; AND - File annual report of condition with secretary of state |
By statute, holding meetings, litigating, or banking in Mass is NOT doing business here
|
|
Consequences of Foreign Corp doing Business without Qualifying
|
- Civil fine
- Liable for lat e fees, interest and penalties, AND - CANNOT sue, but CAN be sued |
|
|
Debt
|
Investor lends capital to the corporation, to be repaid (usually with interest) as specified in the agreement
1. Secured by corporate assets - "bond" 2. Unsecured - "debenture" If you hold a debt security, you are a creditor, not owner |
|
|
Equity
|
Investor buys stock, has ownership interest in the corporation
|
|
|
Issuance of Stock
|
When the Corporation sells its own stock, as a way to raise capital
|
Not stockholders reselling, Corporation only
|
|
Subscription
|
Offers to buy stock from corporation:
- Offers to buy pre-incorporation subscriptions are irrevocable for 6 months - Post-incorporation subscriptions revocable until accepted by Corporation Corp and Subscriber obligated when board accepts the offer |
|
|
Consideration for Stock Issuance
|
"Any tangible or intangible benefit to the corporation"
Par means "minimum issuance price" - Board has authority to determine what amount of consideration is "adequate" |
Conclusive of a valid and adequate issuance - Board may approve for less than par unless articles say so
|
|
Re-acquired Stock
|
Previously issued and has been reacquired by the corporation, corporation may resell it, always treat as no par
|
|
|
Liability on Issuance for no consideration
|
Directors if they knowingly authorized the issuance
X is liable for the consideration |
|
|
Pre-Emptive Right
|
Right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a "new issuance" (sale of authorized and unissued stock) of stock
Includes re-acquired stock |
Exist if the Articles say so
|
|
Directors - Numbers
|
One or more adult natural persons, set by Articles
If not set by Articles: 1) 1 SH, need at least one director; 2) 2 SH, need at least two directors; 3) At least 3 SH, need at least 3 directors |
Staggered Board - divide board by halves or thirds
|
|
Director - Elections
|
Original directors are named in the supplemental form, after that elected by shareholders at the annual meeting
|
|
|
Director - Removal
|
SH can remove directors before term expires with or without cause
Directors of public corporations may be fired only with cause Directors may remove director for cause only with majority vote Board or SH select replacement for vacancy |
|
|
Board's Valid Actions
|
1) Unanimous written consent (e-mail and fax OK) to act without meaning, OR
2) Meeting that satisfies quorum and voting requirements Acts are void unless ratified by valid act Meetings do not have to be in Massachusetts Conference calls count as meeting |
|
|
Board meeting Notice
|
Notice required for special meetings, at least two day's notice of time/place unless articles/bylaws say otherwise in writing, email/oral if reasonable
Failure to notify each director for special meeting to each director renders acts at meeting void unless directors not notified waive defect (writing/signed and filed with minutes; attend without objection) |
|
|
Quorum for Director Meeting
|
Must have majority of all directors to do business (unless different percentage required in articles/bylaws)
If quorum present, passing resolution requires only a majority vote of those present No business can be conducted if quorum is broken |
|
|
Director Proxies
|
Not valid voting
|
|
|
Director Roles
|
Board of directors manage business of corporation
Can delegate substantial management functions to a committee, who CANNOT: 1) declare distributions 2) recommend a fundamental charge to Shareholders 3) fill a board vacancy However may recommend anything to board |
|
|
Duty of Care
|
Director must act:
1) in good faith 2) with care that a person in like position would reasonably believe appropriate 3) with reasonable belief hat her act is in corporation's best interest Burden on P |
Nonfeasance (director does nothing) - "A person in like position would do something regarding the business. director never did anything, so he has breached the duty of care. But he is liable only if Breach caused loss to the corporation" - board fails to supervise
Misfeasance (Board does something that hurts corp) - "Director's action caused loss to corp, BUT director is not liable if she meets the BJR" |
|
Business Judgement Rule
|
A person in like position would do appropriate homework before making a business decision:
- Deliberate - Analyze |
Court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis
|
|
Duty of Loyalty
|
Director act in whith the reasonable belief her act is in the corporation's best interest. Look to interests of any relevant group and of society
BJR never applies when a conflict of interest Burden on D |
|
|
Interested Director Transaction
|
Breach Duty of Loyalty
Interested Director Transaction will be set aside UNLESS director shows: 1) deal was fair to corporation when entered; OR 2) her interest and the material facts were disclosed or known and the deal was approved by either - majority (at least 2) of all disinterested directors; or - Majority of disinterested shares |
Massachusetts - just means not automatically set aside; court may still set aside transaction in interest of fairness
|
|
Competing Ventures
|
Breach Duty of Loyalty
Director cannot compete directly with her corporation, can compete after quit and no non-disclosure agreement Remedy: constructive trusts; may be damages if competition hurt the corporation; tort if you stole legally protected rights |
|
|
Corporate Opportunity
|
Breach Duty of Loyalty
Director cannot usurp a corporate opportunity. The director cannot take it until he 1) tells the board and 2) waits for the board to reject the opportunity Mass Test - Unfair to corp that the director took it |
|
|
State Law bases of Director Liability
|
Improper loans to director only approved by majority of disinterested shares or special board finding that loan benefits corporation
Improper Distributions Sarbanes-Oxley |
|
|
Which Directors are Liable?
|
Director is presumed to have concurred with Board action unless dissent/abstention is noted IN WRITING in records:
- in the minutes; or - in writing to corporate secretary at meeting; or - writing (email/fax ok) to corporate secretary after adjournment Oral dissent alone is ineffective; cannot dissent if voted in favor at meeting Exceptions: - Absent directors not liable - Good faith reliance on info, opinions, reports, statements prepared by corporate officers/employees, professionals, committees |
|
|
Officers
|
Agents of the corporation, can bind corporation by acts with which they have authority;
owe same duties of care and loyalty as directors Officers are selected by and removed by board, which also sets officer compensation |
Deeds to corporate land only valid if signed by Prez/VP AND Treasurer/Assistant treasurer
Inherent authority of President is very limited in Massachusetts |
|
Indemnification of Directors and Officers
|
Mandatory - If wholly successful on merits or otherwise in defending suit
Prohibited - If she lost suit for 1) breach of loyalty; 2) improper personal benefit; 3) improper distribution May be indemnified - show acted in good faith and with reasonable belief that act was within corporation's best interest |
Courts may order indemnification if fair/reasonable in view of all circumstances; usually limited to costs/fees
|
|
Articles Indemnification Provision
|
Articles can provide for limitation or elimination of director liability for damages, but not for 1) breach of duty of loyalty, 2) intentional misconduct, 3) wrongful personal benefit, or 4) improper distributions
|
only applies to directors
|
|
Characteristics of Close Corporation
|
1) few shareholders
2) stock not publicly traded 3) substantial shareholder involvement in management |
Shareholders can eliminate the board and run the corporation by
1) written agreement signed by all SH and filed with the corporation; or 2) articles/by-laws Managing SH then owes the duties of care/loyalty |
|
SH Duties to other SH
|
Duty of utmost good faith and loyalty
More stringent than duty of loyalty |
|
|
Minority SH Protection
|
Controlling SH in close corp cannot pursue a course of conduct when an alternative exists that would be less harmful to the minority SH
Seller of Controlling shares must investigate character/reputation of buyer |
Mass so protective of minority SH because they have no way to avoid oppression because they cannot sell stock
|
|
Equal Access Rule
|
Close corporation must make pro rata offer to minority SH when purchasing shares from controlling SH
|
|
|
Professional Corporations
|
Licensed professionals may incorporate, name must include the designation professional corporation.
SH, Directors, and Officers must be licensed professionals and generally the PC may practice only one profession May employ non-professionals |
Liability - person who committed malpractice and PC are liable for malpractice, SH not liable for others
|
|
Pierce the Corporate Veil
|
Alter Ego - Court might PCV if X's failure to respect the separate corporate entity harmed creditors. Did SH abuse the corporation and does fairness require X held personally liable
Undercapitalization Theory - Here court might PCV because the corporation is undercapitalized when it was formed (failed to invest enough at the outset to cover prospective liabilities) |
Easier to PCV in Tort
May PCV to get at parent corp's assets |
|
Derivative Suits
|
SH suing to enforce corporation's claim, stockholder uses on its own behalf - corporation recovers if S wins, S gets costs/fees in win, may get in loss if suit brought substantial benefit to corp
If corporation could have brought the suit itself, it is derivative |
Beware claim preclusion
|
|
Derivative Suit Requirements
|
Person bringing suit must have owned stock at time claim arose, or gotten it by operation of law from someone who did own stock when the claim arose
Must make written demand on directors that corporation bring suit, in Mass must make demand even if futile |
Operation of law - inheritance/divorce decree
|
|
Derivative Demand
|
SH cannot file derivative suit until 90 days after demand unless corporation rejects demand before then or waiting results in irreparable injury
Corp may move to dismiss suit if majority of disinterested shares or majority of disinterested directors found in good faith after reasonable inquiry that suit not in corp's best interest Courts look at interest and reasonable inquiry; majority of board interested - corp burden, minority interested - P burden |
|
|
What Stockholders Vote?
|
General - Record stockholder as of the record date hast the right to vote
Exceptions: - Re-acquired stock, nobody votes - Death of SH, executor may vote - Proxies |
|
|
Record Stockholder/Date
|
Person shown as the owner in the corporate records
Date is a voter eligibility cut-off, no more than 70 days before the meeting |
|
|
Proxy Definition
|
1) Writing (email/fax ok)
2) signed by record SH 3) directed to secretary of corporation 4) authorizing another to vote the shares |
May revoke, irrevocable if coupled with an interest and says "irrevocable"
|
|
Voting Trust
|
- Written trust agreement controlling how shares will be voted;
- File copy with corp; - Transfer legal title of shares to voting trustee; - Original shareholders receive trust certificates and retain all shareholder rights other than voting |
|
|
Voting Pool
|
In writing and signed, enforceable by statute, CANNOT be voting agreements among directors
|
|
|
Valid SH Action
|
Unanimous written consent (email/fax ok) of holders of all voting shares; OR meeting that satisfies quorum and voting rules
|
|
|
Types of SH Meetings
|
Annual - to elect directors and other things, may ask court to order one if no meeting within 15 mo or 6 mo of end of fiscal year
Special - called by board, holders of at least 10 percent of voting shares (40% if private) or someone else provided by articles/bylaws |
|
|
SH Meeting Notice
|
must give written notice to every shareholder entitled to vote for every meeting between 7 and 60 days before meeting
|
when, where, why
Consequences of notice failure - void unless waived by: -- express -- implied; attend without objecting |
|
How do SH vote?
|
Must be Quorum - if articles are silent, majority of shares entitled to vote; majority of those who vote is required not entirety to pass
|
|
|
Cumulative Voting
|
Available only when electing directors, only when expressly in Articles
Multiply number of shares times number of directors to be elected 100/(X+1) = 10% need one more than 10% share |
|
|
Stock Transfer Restrictions
|
set by bylaws/articles/agreement
First right to refusals are ok assuming corporation offers a reasonable price |
Cannot be invoked against a third party unless either conspicuously noted on front/back of note OR actual knowledge of restriction
|
|
Right of SH to Inspect Books/Records
|
Any SH has the right, 5-business day written demand for routine documents, others written demand with proper purpose and records desired 5-business days before inspection
|
Proper purpose - One related to interest as SH
If refused, move for court order |
|
Distributions
|
Payments to shareholders - can be:
- divided - repurchase sh stock - redeem stock (forced sale to corp at price set in articles) |
Distribution declared in Board's discretion, can be compelled in suit showing very strong abuse of discretion - tough
|
|
Preferred Stock
|
Pay first, taken off the top, subtract amount taken from total to compute common shares
|
|
|
Participating Stock
|
Type of preferred stock; means pay again. Take preferred off the top, then pay again from common stock
|
|
|
Cumulative Stock
|
Type of preferred stock; means add them up. Accrues year-to-year, owe X years $__ of preferred stock
|
|
|
Funds for Distribution
|
Historically - board had to be concerned with various funds, some of which available for paying distribution
Today - Corporation CANNOT make a distribution if it is insolven tor if the distribution would render it insolvent |
|
|
Insolvent definition
|
- Unable to pay debts as they come due; OR
- Assets are less than liabilities; including liquidation preferences |
|
|
Improper Distribution liability
|
Directors strictly liable personally for improper distribution - good faith defense
SH liable if knew improper |
|
|
Fundamental Corporate Change
|
- Extraordinary occurrences, so they require board action; AND
- Notice of all shareholders (regardless of vote status); AND - Approval by 2/3 of shares entitled to vote |
|
|
Right of Appraisal
|
Exists in close corp - Right of a shareholder to force the corporation to buy her shares at fair value
Corp pays reasonable price, if SH thinks too low has 30 days to send estimation of value, if corp disagrees it must sue within 60 days Exclusive remedy unless fraud Actions that trigger appraisal: - Merger - Transfer of substantially all asets not in ordinary course of business - Transfer of shares in a share exchange - some amendments to the articles; - Conversion |
|
|
Perfect Right of Appraisal
|
Before - File with corporation notice of intent to demand payment
During - Abstain or vote no After - Make written demand to be bought out |
|
|
Amendment of Articles
|
- Board of director action AND notice to all shareholders
- SH approval (2/3 all SH; unless name change) - If approved, deliver amended articles to the state secretary - Dissenting SH right of appraisal if amendment hurts stock |
|
|
Mergers
|
- Board action for both corps AND notice to all SH of DISAPPEARING corp
- SH approval of DISAPPEARING corp, survivor does not vote - If approved, deliver articles of merger to tate secretary |
Effect: - survivor succeeds to all rights and liabilities of constituent companies (Successor Liability)
|
|
Disposition of All/Substantially All assets not in ordinary course of business or share exchange
|
Fundamental Corporate changes for the selling corporation:
- Board of direction action (both) and notice to all of the selling corporation's shareholders (2/3, dissenting shareholders' rights of appraisal) - Deliver Article of Share Exchange, no filing in sale of assets |
|
|
Conversion
|
Convert from one form of business to another;
Requires board action and approval by 2/3 of shares entitled to vote Deliver to State secretary |
|
|
Voluntary Dissolution
|
- Board of directors action and approval by 2/3 of shares entitled to vote.
- Deliver articles of dissolution to state secretary and give notice to creditors |
|
|
Involuntary Dissolution
|
By court order
1. 40% of voting shares can petition because of: - director deadlock that threatens irreparable harm to corp, or - shareholder deadlock and failure for at least two annual meetings to fill a vacant board position 2. Creditor can petition because the corp is insolvent and either: - has an unsatisfied judgment against the corp OR - the Corp admits the debt in writing |
|
|
Administrative Dissolution
|
State secretary can effect dissolution for corporate failure to file annual reports or pay taxes for two years or if corp inactive or if dissolution is in public interest
|
No wind-up
|
|
Winding Up
|
Four steps:
- Gather all assets - Convert to cash - Pay creditors, and -- (Directors liable for amounts improperly distributed, SH return $ to creditors) - Distribute remainder to shareholders pro-rata by share unless dissolution/liquidation preference |
After articles of voluntary dissolution are filed, or after involuntary dissolution order corp stays in existence to wind up (or liquidation)
|
|
Liquidation Preference
|
Works like a dividend preference, means "pay first"
- Relevant to insolvency, would be included as liabilities |
|
|
Massachusetts Uniform Securities Act
|
§ 101 - antifraud, prohibits following in connection with offer/sale/purchase of any security:
- Device or scheme to defraud; - Material misstatements of fact; - Omission of fact necessary to make statements that were made not misleading; AND - Any act or practice that would "operate" as a fraud Must actually prove D knowingly engaged in fraud |
|
|
Massachusetts Consumer Protection Act
|
Mass Genl.Laws ch. 93A prohibits use of unfair or deceptive practices and unfair methods of competition in any business or trade (includes securities)
Must disclose something buyer would consider important in making investment decision Need demand letter within 30 days SOL - 4 years; res. person would learned |
Remedies - usually double/treble damages plus attorney's fees, but in Sale of Securities you are limited to actual damages and attorney's fees
|
|
Control Premium
|
Controlling SH may be able to sell her stock at a premium over its economic value as a percentage of ownership
|
In Mass, majority SH under fiduciary duty when selling control (investigate Character/reputation of buyer)
|