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93 Cards in this Set

  • Front
  • Back
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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)