Corporations

Front 1

What does it take to form a corporation?

Back 1

People, Paper, Act

Front 2

Ultra Vires Rule

Back 2

Ultra vires activity is beyond the scope of the articles.
(1) valid,
(2) S/H can seek injunction, and
(3) Responsible O's and D's are liable to corp for UV losses

Front 3

De Jure Corp

Back 3

The "Act" -- Delivery of articles to secretary and state and paying fees. Conclusive proof of valid formation

Front 4

De Facto Corporation

Back 4

Failure to form de jure corp. Are they liable? No, if (1) relevant incorporation statute, (2) parties made good faith attempt to comply with it, and (3) there is exercise of corporate privileges (acting like a corporation)

Mention that this may be abolished in NV

Front 5

Corporation by Estoppel

Back 5

Failure to form a de jure corp.

One who treats a business as a corporation may be estopped from denying that its a corporation. More likely in K, not tort cases.

Mention that this may be abolished in NV

Front 6

If bylaws conflict with articles, which controls

Back 6

Articles control (b/c they are filed with state).

Front 7

Rule of liability for Promoters / Corps

Back 7

1. Corporation not liable on pre-incorporation K's until it adopts contract (either express or implied)

2. Promoter is liable on K until there is a novation (not just adoption) (unless K expressly indicates promoter is not liable)

Front 8

Foreign Corporations requirements

Back 8

1. provide info from articles
2. show good standing
3. appoint registered agent in NV and agreement to serve
4. pay fees

or else you can't sue in state. (you can remedy this later)

Front 9

Consideration for issuance of stock

Back 9

any tangible or intangible property or benefit to the corp

if a future benefit is not fulfilled, the stocks may be canceled by the corp unless bought by a BFP

Front 10

revocability of subscriptions

Back 10

pre-incorporation: irrevocable for 6 months unless all subscribers agree

post-incorporation: revocable until accepted

Front 11

Pre-Emptive Rights

Back 11

No preemptive rights unless article provides for them.

Only applies in issuance of stock for CASH.

S/H gets right to maintain % of ownership by buying more stock first.

Front 12

Rule for Appointment and Removal of Directors

Back 12

Shareholders elect at annual meeting
Can remove at any time with 2/3 vote, with or without cause

if a vacancy before term is up, elected by majority of remaining board

Front 13

How Directors take an act

Back 13

(1) unanimous written consent, or a (2) meeting with quorum / voting requirements

If not met, act is void unless ratified by later valid act.

Front 14

Quorum / Voting Requirements Rule for Directors

Back 14

(1) Quorum = majority of all directors shows up (unless different in bylaws)
(2) Quorum can be defeated by people leaving
(3) Majority of those PRESENT must vote

No proxies allowed!

Front 15

Duties owed by Directors

Back 15

Duty of Care
Duty of Loyalty

Front 16

Duty of Care definition

Back 16

Director owes corporation a duty of care: He must act in GOOD FAITH, and do what a PRUDENT PERSON would do with regard to her own business.

(burden on plaintiff)

Front 17

Two types of duty of care

Back 17

Nonfeasance (not doing anything, but only liable if causation)
Misfeasance (does something that hurts corp -subject to BJR)

Front 18

Business Judgment Rule

Back 18

Court will not second guess decision if (1) good faith, (2) informed, (3) rational basis

Front 19

Duty of Loyalty definition

Back 19

Director owes the corporation a duty of loyalty. He must act in (1) GOOD FAITH, and (2) with a REASONABLE BELIEF that its in the corporation's best interests.

BJR does not apply here.

Front 20

Duty of Loyalty Fact Patterns

Back 20

Interested Director
Competing Ventures
Corporate Opportunity

Front 21

Interested Director Rule

Back 21

Loyalty Rule. ID transaction will be set aside (or D liable) UNLESS D shows
(1) deal was fair to corporation when entered into, OR
(2) her interest was disclosed to and approved by (1) Majority of the disinterested directors, OR (2) majority of the disinterested shares entitled to vote

Front 22

Competing Ventures Rule

Back 22

Loyalty Rule. A director cannot compete with her corporation.

Remedy is constructive trust on profits.

Front 23

Corporate Opportunity (Expectancy) and when able to proceed on it

Back 23

Loyalty Rule. D Cannot USURP a corporate opportunity.

D cannot take it unless D (1) tells the board, and (2) waits for board to reject the opportunity.

Front 24

What constitutes a corporate opportunity / expectancy?

Back 24

(1) Something in corporation's business line

(2) Something the corporation has an interest / expectancy in

(3) Something D found on company time or with company resources.

Front 25

Other grounds for director liability

Back 25

(1) Ultra vires acts
(2) Improper distributions
(3) Improper Acts of other directors [unless D dissented in WRITING, was absent, or had good faith reliance on info presented by others]

Front 26

Duties owed by Officers

Back 26

Same duties as Directors. Duty of Care and Duty of loyalty.

They are AGENTS of the corporation, so they can bind the corp by acts which they have authority for.

Front 27

Selection and Removal of Officers

Back 27

Officers are selected / removed by directors, and they set compensation.

Shareholders do NOT hire and fire officers.

Front 28

Indemnification of Directors / Officers (3 rules)

Back 28

(1) No indemnification when D/O was liable to corporation

(2) Mandatory indemnifcation when D/O is successful in defending on merits

(3) Permissive indemnification if not (1) or (2), e.g. settlement.

Disinterested directors determines eligibility of reimbursement

Court can also order reimbursement if justified

Front 29

When do shareholders manage corporation?

Back 29

Only in a close corporation: (1) few shareholders, (2) stock not publicly traded.

Must be in articles and unanimous shareholder written agreement.

Front 30

Duties owed by shareholders in close corporation

Back 30

Fiduciary duties owed to each other like in a partnership. Especially, controlling shareholders should not oppress minority shareholders. (minority can't sell her shares to get out)

Front 31

Liability of shareholders in close corporation

Back 31

Not liable for corporate obligations or other shareholders malpractice. Advantage over a partnership.

Front 32

Piercing the Corporate Veil

Back 32

Applies to close corporations. S/H must have (2) abused the privilege of incorporating, and (2) fairness requires holding them liable.

COURTS MORE WILLING TO PCV FOR TORT VICTIM THAN FOR K CLAIMANT.

Front 33

Alter Ego fact pattern

Back 33

Court will PCV if S/H failed to respect the separate corporate entity, and it harmed creditors. Sloppy administration is generally not enough for PCV.

Front 34

Undercapitalization fact pattern

Back 34

Court may PCV if the corporation was under-capitalized when formed, because shareholders failed to invest enough to cover prospective liabilities.

Never enough to PCV by itself

Front 35

Shareholder Derivative Suit requirements

Back 35

Suing to enforce the corporations claim, not personal.

(1) STOCK OWNERSHIP at time of the act of which the claim is based

(2) ADEQUATE REPRESENTATION of corporation's interest

(3) WRITTEN DEMAND on corporation, unless futile.

Corporation is joined as a defendant (technicality)

Settle / Dismissal only with Court approval.

Front 36

Dismissal of Shareholder Derivative Suit by Corporation

Back 36

Corp can move to dismiss only by INDEPENDENT INVESTIGATION showing that suit was not in the corporations's best interests (low chance of recovery / expense exceeds recovery). Must be by independent directors or court-appointed panel.

Court may also make its OWN assessment in addition to independent director assessment.

Front 37

What Shareholder Votes

Back 37

Record shareholder as of the record date has the right to vote.

EXCEPTION: (1) Corp reacquires stock before record date, makes it treasury stock and corp does not vote on it. (2) Death of shareholder = executor can vote the shares

Front 38

Shareholder Voting Proxies Requirements

Back 38

(1) Writing, (2) Signed by record shareholder (3) Directed to secretary of corp (4) authorizing another to vote the shares

REVOCABLE even if it SAYS IRREVOCABLE, unless proxy is coupled with AN INTEREST AS WELL. (e.g. interest in shares other than voting)

good for 6 months unless otherwise stated, but never more than 7 years

Front 39

Voting Trusts and Voting Agreements

Back 39

TRUST:
(1) Written trust
(2) Transfer legal title to voting trustee
(3) Transfer of legal title is recorded with the corp
(4) Original S/H receive trust certs and retain all S/H rights except for voting

AGREEMENT: not clear if specifically enforceable
(1) Writing
(2) Signed

Front 40

Shareholder Meetings (2 types)

Back 40

(1) Annual meeting: To elect directors (if none held in 15 months, can petition court to order one

(2) SPECIAL meeting can be called by (1) unanimous board, (2) any two directors (3) the president (4) anyone else authorized.

BUT if a special meeting is called, it must be for a PROPER SHAREHOLDER PURPOSE (e.g. can't call meeting to remove an officer).

Front 41

Notice requirements for shareholder meetings

Back 41

(1) Written notice to every S/H
(2) Delivered 10-60 days before meeting
(3) WHERE, WHEN, and WHY (purpose is important - cannot go beyond purpose at meeting)

Failure to give notice makes action taken at meetings VOID, unless WAIVER: (1) express (2) implied [attended meeting w/out objection]

Front 42

Shareholder Voting Requirements

Back 42

(1) Quorum = majority of outstanding SHARES
Quorum can't be lost if shareholders leave (can with directors)
(2) Majority of shares entitled to vote.

Front 43

Stock Transfer Restrictions Test

Back 43

Will be upheld if they are REASONABLE UNDER THE CIRCUMSTANCES, which means not an undue restraint on alienation.

Even if it meets the test, it CANNOT BE INVOKED against TRANSFEREE, unless
(a) it is -conspicuously noted- on the stock certificate, or
(b) transferee had -actual knowledge- of the restriction.

Front 44

Process of Shareholder to Inspect Books / Records

Back 44

1. Must make a written demand stating documents desired at least 5 days prior, and
2. Proper purpose for inspection (e.g. related to his role as a shareholder)

Directors don't need to do this.

Front 45

Types of Distributions

Back 45

(1) Dividend
(2) Repurchase Shareholders stock
(3) redeem stock (forced sale to corporation at price set in article)

Front 46

Rules for Distributions and improper distributions

Back 46

(1) Declared in Board's discretion
(2) No right to distribution until its declared.
(3) Action to compel distribution is hard to win, must make very strong showing of abuse of discretion

Directors joint and severally liable for improper distributions. S/H liable if they knew it was improper when they recevied it. Director has good faith reliance defense.

Front 47

Which Shareholders get Dividends?

Back 47

Preferred --> Pay first
Participating --> Pay First, then Pay Again
Cumulative --> Add up the years it wasn't paid
Common --> Regular guys

Front 48

when can distributions not be made

Back 48

Corp cannot make distribution if it is insolvent or distribution would make it insolvent.
(1) Corporation is unable to pay its debts, or
(2) Total assets are less than total liabilities (and liabilities include preferential liquidation rights)

Front 49

Fundamental Corporate Changes

Back 49

(1) Extraordinary occurrence, requires
(2) Board of director action, AND
(3) approval by majority of shares -entitled- to vote

Possibility of dissenting shareholder right of appraisal (force corp to buy her shares at fair value)

Front 50

When will a S/H have a dissenting shareholder right of appraisal?

Back 50

ONLY available for close corporations- corp must buy stock

(1) Merger or consolidation

(2) Transfer of shares in a share exchange

Front 51

What must shareholder do to perfect her right of appraisal?

Back 51

(1) before vote, file w/ corp written notice of objection and intent to get appraisal, AND
(2) abstain / vote against change, AND
(3) After vote, make written demand

Court may appoint appraiser if they can't decide on far value of shares

Front 52

Amendment of Articles

Back 52

Is a fundamental corporate change.

Need S/H majority.

No dissenting S/H right of appraisal.

Front 53

Merger or Consolidations

Back 53

Fundamental Corporate Change

Need (1) board of director action [both corps] AND (2) notice to shareholders, and (3) majority shareholder approval by both corporations

Front 54

Effect of Merger

Back 54

successor liability- surviving corporation succeeds to all rights and liabilities of the constituents

Front 55

Short-Form Merger Exception

Back 55

No shareholder approval or subsidiary board of director approval required if 90% or more own subsidiary is merged into parent corporation.

BUT STILL has dissenting shareholder right of appraisal.

Front 56

Transfer of All or Substantially All of Assets Not in the Ordinary Course of Business [or Share Exchange - one co gets all stock of another]

Back 56

Fundamental Corporate change for the TRANSFERRING corporation ONLY. NOT a change for the buying corporation.

Board of director action (BOTH corps) and notice to TRANSFERRING corp's shareholders needed.

Majority Approval by TRANSFERRING corporation's shareholders needed.

Dissenting rights of shareholder's appraisal for the transferring corporation only.

No successor liability here (vs. merger there is)

Front 57

Voluntary Dissolution of Corporation

Back 57

Board of directors action AND approval by majority of shares entitled to vote

Front 58

Rule 10b-5

Back 58

Aimed at Deceit. Prohibits misrepresentation (or nondisclosure) in connection with the purchase or sale of any security.

types of transactions:
(1) Insider trading
(2) Misrepresentation of material info
(3) Tipping

Front 59

Who can sue under 10b-5

Back 59

(1) SEC
(2) buyer or seller of securities, but not a person who doesn't sell b/c of misrepresentation

Front 60

Tipper

Back 60

Tipper: (1) passes material inside information in breach of duty to corp, and (2) benefits [gift or reputation is enough]

Front 61

Scienter for 10b-5

Back 61

Must have intent to deceive, manipulate or defraud. Recklessness may suffice, negligence is not liable

Front 62

16B Rule

Back 62

Aimed at speculation by Directors / Officers / 10% Shareholders.

Strict liability!

Prohibits profits gained by insider trading.

Only applies to Big publicly traded companies (national exchange, or 500 S/H and $10 mil in assets)

Front 63

16B Application and Rule

Back 63

Prohibits short swing trading. All profits are recoverable by corporation.

Rule: If, within six months BEFORE or AFTER any SALE, there was a purchase at a LOWER PRICE, then that is a PROFIT.

Order doesn't matter.

Largest number of shares both bought and sold is the remedy price

Front 64

Short form merger requires

Back 64

Approval by Parent Board of Directors ONLY

NO approval by Subsidiary BOD
NO approval by Subsidiary S/H
NO approval by Parent S/H (if no fundamental corporate change results)

Front 65

what must be included when filing the articles of incorporation

Back 65

1. corporate name
2. name and address of each incorporator
3. name of each initial director
4. name and address of registered agent

Front 66

requirements to inspect records

Back 66

routine things
1. owned stock for 6 months, or
2. at least 5% of outstanding stock

sensitive things
1. at least 15% of outstanding stock

Front 67

penalty for denial of records

Back 67

routine things- $25 per day

sensitive things- $100 per day

Front 68

Involuntary Dissolution of Corporation

Back 68

Involuntary (by court order) --> 10% of shareholders can petition because of

(1) gross mismanagement
(2) insolvency
(3) abandonment of business
(4) willful violation of articles

If close corporation, court might just order buy out of petitioning shareholder.

Front 69

Tippee

Back 69

(1) traded on the tip
(2) knew or should of know that information was improperly passed

Can't be a tippee without a tipper (e.g. can overhear it at movie theater = ok)