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145 Cards in this Set
- Front
- Back
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Corporation (corp) is
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a legal entity distinct from its owner created by filing certain docs with state.
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Characteristics of corp.
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1. limited liability for owners, directors & officers
2. centralized mgmt 3. free transferability of ownership 4. continuity of life 5. taxed as S Corp or C Corp |
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C Corp is taxed
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as an entity distinct from owner. Advantageous for persons who want to delay realization of income, but price is double taxation.
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S Corp is taxed
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like partnerships yet retain advantages of corporate form. No double taxation, b/e profits & losses flow through the entity to owners. (# of restrit/s such as no more than 100 SHs)
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Compare sole proprietorship w/ corp
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Unlike corp:
1. not an entity distinct from the owner. 2. owner personally liable for the bus obligations 3. "entity" cannot continue beyond life on owner. 4. all profits & losses flow through directly to owner. Like corp, ownership freely transferable. |
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Compare partnership w/ corp
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Unlike corps:
1. little formality to set up 2. owners have personal liability 3. not treated as sep entities 4. management is spread out 5, ownership rights cannot be freely transferred w/o consent of other partners 6. no life beyond lives of owners 7. profits & losses flow through directly to owners. |
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Compare corp w/ limited partnership
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provides limited liability for limited investors but otherwise is similar to other partnerships except can only be formed by compliance w/ LP statute. Must be at least one general and one limited partner. General partner has mgmt rights & incurs personal liability.
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Compare corp w/ limited liability company
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limited personal liability like corp but flow through tax advantages of a partnership. Like corp, formed only be filing appropriate docs w/ state but otherwise flexible. Owners can choose type of management & whether to restrict transferability.
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Discretionary indemnification
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Corp MAY indemnify a director or officer for reasonable expenses incurred in UNSUCCESSFULLY DEFENDING a suit against him on account of his position if conduct was in good faith, with a belief it was in the best interests of the corp and the conduct was not unlawful.
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Under Con, when is corp a "person"? not a "person"
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Corp is a "person" entitled to due process, equal protection & attorney client priv,
Corp is not a "person" under the 5thA priv against self incrimination. |
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Under Con, when is corp a "citizen" not a "citizne"?
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For fed diversity juris/n purpose, corp IS a citizen of any state of incop & state of its principal place of bus.
Corp IS NOT a citizen for purposes of the Privs & Immunities Clause. |
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In what state(s) is corp a "resident" under the Con?
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State of incorp, where it is doing bus AND where it is qualified to do bus.
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In what state(s) is corp "domiciled"?
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any state where incorp.
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Law governing corps
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state corp. law. Maj. adheres to Revised Model Bus. Corp. Act (RMBCA)
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3 terms used to describe corp formation
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De Jure corp
De Facto corp Corp by estoppel |
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De Jure corp
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formed in compliance w/ law following ALL statutory provisions. INCORPORATORS must file ARTICLES OF INCORPORATION w/ the sec of state. Insulates against personal liability of SHs
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Issue: Is corp act w/in bus purpose?
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Traditionally, stmt of bus purposes in articles of incorp. If no stmt, RMBCA presumes corp has power to CONDUCT ANY LAWFUL BUS. Under most mod stat, corp is given power to do all things necessary, convenient & rationally re/d to a bus purpose. So unless ? restricts corp purposes, most acts are w/in corp powers.
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Ultra vires act
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beyond the scope of power allowed by corporate charter or the law. CL: void & unenforceable. Under RMBCA, usually enforceable & raising ultra vires act ineffective.
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Under RMBCA, ultra vires nature of an act can only be raised in what 3 sits?
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1. SH may sue corp to enjoin a proposed ultra vires act.
2. Corp may sue an officer or director for damages for approving an ultra vires act + 3. State may bring an act to dissolve corp for committing an ultra vires act. |
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When does Corp existence begin?
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on day articles filed w/ state
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De Facto corp characteristics
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1. STAT under which the entity could have validly incorporated
2. COLOARABLE COMPLIANCE w/ most statutory provisions 3. CONDUCT OF BUS in corp name & exercise of corp privileges. has all the right & privileges of a de jure corp but is not b/e of some omission or mistake. does insulate SH against personal liability but subj. to quo warranto proceeding |
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De facto corp characteristics
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1. STAT under which the entity could have validly incorporated
2. COLOARABLE COMPLIANCE w/ most statutory provisions 3. CONDUCT OF BUS in corp name & exercise of corp privileges. has all the right & privileges of a de jure corp but is not b/e of some omission or mistake. does insulate SH against personal liability but subj. to quo warranto proceeding. |
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quo warranto proceeding (re corps)
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action by which state seeks to revoke corp's charter
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Limitation of raising de facto corp as defense
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person who dealt w/ entity knowing it was not properly incorporated cannot use fact as a defense to liability--i.e. only available to person who was unaware
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Corp by estoppel
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Parties act as if there is a copr, so no requirement of following statutory provision. Persons who have dealt w/ the entity as if it were a corp will be estopped from denying corp's existence. Applies to Ks, not torts.
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Piercing the corporate veil
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disregard of the corporate entity holding individuals liable for corporation liabilities.
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3 sits justifying piercing the corp. veil
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1. Alter ego--disregard of corp
2. inadequate capitalization AT TIME OF FORMATION 3. Necessary to prevent fraud or SH from using corp to avoid his EXISTING personal obligations. |
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Piercing the corp veil--who is liable?
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Normally, only SH who were active in the operation of the bus will be personally liable. Joint & several
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Debt securities
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borrowed $ from outside investors who do not have an ownership interest in corp
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2 types of debt securities
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Bond--secured
Debenture--unsecured |
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Equity securities (SHARES)
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give holders an ownership interest in the issuing corp
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Shares described in corp's articles of incorp are
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authorized shares
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Shares which have been sold are
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issued & outstanding
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Shares reacquired by corp through repurchase or redemption are
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authorized but unissued
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common stock
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class of stock entitling holder to vote on corp matters & to receive dividends & share in assets upon liquidation.
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preferred stock
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class of stock giving its holder a preferential claim to dividends & to corp assets upon liquidation but that usually carries no voting rights
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stock subscriptions
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promises from subscribers to buy stock in corp.
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preincorp subscription
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Under RMBCA, IRREVOCABLE FOR SIX MONTHS unless otherwise provided in subscription agreement or all subscribers consent to revocation.
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ISSUE: forms of consider/n to pay for shares
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RMBCA has expanded what is acceptable in that shares may be paid for w/ ANY TANGIBLE OR INTANGIBLE PROP. Older statutes did not allow shares to be issued for promissory notes or promises of future work. These are now acceptable.
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par value stock
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stock originally issued for a fixed value derived by dividing the total value of capital stock (common + preferred) by the # of shares to be issued. Traditionally stock could not be issued by a corp for less than stock's stated par value. Today concept much relaxed.
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Issue if director authorizes sale of stock for less than state par value
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Share will probably be issued, but director possibly could be held liable for breach of fiduciary duty
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Promoter
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founder or organizer of corp or bus venture; one who takes entrprenuial initiative to procure commitment for capital & other instrumentalities that will be used by corp after its formation.
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Promoters re/ship w/ ea other?
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joint venturers w/ fiduciary re/ship
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Promoters re/ship w/ corp
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1. fiduciary duty of fair disclosure & good faith
2. breaches duty if profits from sale to corp & did not disclose all material facts of trans/n. 3. Liable for fraud if Ps can show damage due to fradulent misrepresentations or failure to disclose all mat facts |
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Fed law preempts state regs of securies EXCEPT
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1. penny stocks
2. intrastate offerings 3. actions against brokers for fraud 4. notice filing requirements for stocks sold w/in state. |
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Promoters re/ship w/ 3rd parties
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Anyone who acts on behalf of not yet formed corp knowing it is not in existence is PERSONALLY, jointly & severly liable for obligations incurred.
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How long does promoters personal liability continue?
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Until after corp formed even if corp adops the K & benefits from it. Promoter will be released only w/ novation. Promoter may have right to reimbursement.
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Exception to promoter's liability?
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If agreement expressly relieves promoter of liability. Therefore there is no K & arrangement may be construed as a revocable offer to the proposed corp.
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Corp's liability to 3rd parties w/ whom promoter has Ked.
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NOT BOUND until incorporated & expressly or impliedly ADOPTS K.
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Power to manage corp generally invested in
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directors
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SHs power to manage corp's bus
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generally no direct control. RMBCA allows SHs to enter into agreements to dispense w/ the board & vest power in the SH. If corp's articles do not include this SHs only have indirect control through voting power.
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SH meetings--2 types
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1. annual--corps must hold
2. special |
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SHs must be notified of meetings
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not less than 10 days or more than 60 days before meeting.
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Proxies are
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revocable authoizations in writing of SH granting right to vote in place of SH.
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Proxy is irrevocable only if
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couple w/ an interest or given as a security.
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Statutory rules around proxies include
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1. full & full disclosure of management proposals on which SHs are to vote
2. prohibition of material misstatemts, omissions, fraud 3. management must include SH proposals in mailings. |
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Rules around mechanics of voting
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1. Quorum is usually a MAJ of outstanding shares entitled to vote.
2. Unless otherwise provided, directos are elected by a PLURALITY of the votes case. |
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cummulative voting
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system for electing corp directors whereby SH may multiply his # or shares by # of open director positions & cast all for one or a few directors.
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effect of cummulative voting
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allows minority SH to elect at least one director.
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Sh agreements include (4)
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1. voting trust
2. voting agreement 3. SH management agreement 4. restrictions on transfer of stock |
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Voting trust is
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written K among SHs for any proper purpose under which they transfer legal ownership of shares to a trustee who votes on their behalf (creating voting block). SHs retain equitable ownership & receive dividends. Corp must get copy & limit 10 yrs.
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voting agreement (or pooling agreement)
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Kual agreement for any proper purpose by which SH agree to vote as a unit. Need not be given to corp & no time limit.
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To be valid, shareholder management agreements
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must be set forth in bylaws & approved by all persons who are SH at the time of adoption. Valid for 10 yrs unless they provide otherwise, but end if corp"s shares are listed on national exchage
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To be valid, restriction of transfer of stock
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must be reasonable (e.g. right of 1st refusal). 3rd party bound only if restriction CONSPICUOUSLY NOTED or had knowledge at time of purchase.
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SH rights to inspect corp's books are either
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qualified or unqualified.
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(Qualified right) SH has right to inspect corp's books, papers, accounting, SH records etc if
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1. proper purpose
2. 5 days' written notice |
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Even w/o proper purpose, SH has unqualifed right to inspect
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1. corp's articles & bylaws
2. board resolutions re: classifications of shares 3. minutes of SH meetings past 3 yrs. 4. communications sent to SH past 3 yrs. 5. names & addresses of current officers & directors 6. copy of corp's most recent annual report. |
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preemptive right
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SH's priv to purchase newly issued stock--before stocks sold to general public--in an amt proportionate to SH's current holdings in order to prevent dilution of the SH's ownership interest,
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Shareholder suits involve what 2 types?
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direct actions
derivative actions |
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SH may bring a direct action for
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breach of fiduciary duty owed to SH by an officer or director.
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In a derivative action, SH is
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asserting the corp's rights rather than the SH's own
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To distinguish b/n duties owed to corp & those owed to SH ask
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1. who suffered the most immediate & direct damage?
2. to whom did the duty run |
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Elements of derivative action
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1. Standing
2. Demand requirements 3, Board of directors will dismiss if found not in corp's best interest. 4. Discontinuance or settlement requires court approval. 5. Court may order corp to pay P's expenses if action resuled in benefit to corp. |
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For derivative actions, standing requirements for P
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1. must have been SH at time of act or omission
2. must farily & adequately represent the interests of the corp. |
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The demand requirement for derivative actions involves
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SH making a WRITTEN DEMAND on corp to take suitable action. SH has to wait 90 days after date of demand unles 1.) SH has received notice corp has rejected or 2.) waiting 90 days would cause irreparable injury to corp
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Dismissal of derivative suit by board of directors is valid only if
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a majority w/ no personal interest find in GOOD FAITH AFTER REASONABLE INQUIRY that suit is not in corp's best interest.
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Close corp
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corp whose stock is not freely traded & is held by only a few SHs (often w/in same family)
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Duty of close corp Shs to each other
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generally same as that of partners to each other
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Do SHs generally have fiduciary duty to corp or fellow SHs?
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No, except controlling SHs must refrain from using control to create unfair prejudice to minority SHs. (e.g.controlling SH may be liable for selling corp to inds who end up looting co.)
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BoD duties
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management of the bus & affairs of corp.
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Notice requirements for Directors' meetings
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Annual--none needed
Special--2 days |
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Quorum for BoD's meetings
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Majority unless higher % in bylaws or articles
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Alternative to approval by voting majority at BoD meeting
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UNANIMOUS WRITTEN CONSENT
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ISSUE: Authority of director to bind corp
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Must be actual authority which arises only if
1. proper notice for director's meeting 2. quorum was present 3. majority of directors approved or 4. unanimous written consent |
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Articles of Incorp may limit directors' personal liability except that arising from
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1. liability for director receiving $ benefits to which director not entitled
2. intentional torts 3. unlawful corp distributions 4. intentional crimes |
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Directors' dutites
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1. care
2. disclosure of material corp info to other board members 3. loyalty |
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Duty of care includes
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managing to the best of their ability and d/cing duties
1. in good faith 2. w/ care an ordinarily prudent person in a like position would exercise under similar circumstances and 3. in a manner the directors reasonably believe to be in the best interests of the corp. |
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Business judgment rule
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Directors who meet standards of the duty of care will not be liable for corp. decision that in hindsight turn out to be poor or erroneous.
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A challenger to a director's action
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has the burden of proving the statutory duty of care was not met
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In d/cing duties, may director rely on reports or other info?
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Yes if info comes from:
1. officers or employees whom director reasonably believes reliable. 2. lawyers, accountants, etc if director reasonably believes professionally competent 3. board committee if director reasonably believes merits confidence. |
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Duty of loyalty
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Directors owe a duty to place corp interests ahead of personal interests, to avoid self dealing & using position to further personal interests rather than that of corp.
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What is conflicting interest transaction?
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If director knows that she or a related person:
1. is a party to the transaction 2. has a beneficial $ int or other int which would reasonably expected to effect director's judgement or vote or 3. is director, general partner, agent or employee entity w/ whom corp is transacting bus and 4. the transaction is impt enough to normally require board action. |
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A conflicting interest transaction can be upheld by
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a vote of a majority of disinterested directors or vote of majority of SHs after all material facts disclosed. The transaction can also be upheld by an assessment that it was FAIR TO CORP at time commitment made.
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Special quorum requirements for voting on conflicting int transactions
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Director's meeting: majority of disinterested directors but not less than 2
SHs meeting: majority of eligible votes entitled to be cast--not including interested SHs |
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Factors used in determining fairness
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adequacy of consideration
corporate need to enter into transaciton $ position of corp available alternatives |
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Corporate opportunity doctrine
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rule that corp's directors, officers & employees are precluded from using info gained as such to take personal advantage of any bus opportunities that the corp has an expectancy right or prop int in or in fairness should belong to corp. Director's fiduciary duties prohibit then from taking advantage of such an opportunity before 1st giving their corp opportunity to act.
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Issue: usurpation of a corporate opportunity
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occurs if director takes advantage of a bus opportunity inw hich the corp would have an INTEREST or EXPECTANCY. The closer to corp's LINE OF BUSINESS, more like court will find corporate opportunity.
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Remedies
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If director usurps opportunity, corp can recover profits or may force director to convey to opportunity to the corp under a constructive trust theory.
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Officers
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persons elected or appointed by BoD to manage the daily operations of a corp.
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Duties of officers
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determined by bylaws or, to extent consistent with bylaws, by the board of an officer so authorized by the board.
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Powers of officers
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Ordinary rules of agency determine authority & powers. May be actual or apparent. Unauthorized actions may become binding on the corp b/e of ratification, adoption, or estoppel. The corp is liable for ac/ns by officers w/in scope of authority.
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Standard of conduct
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officers must carry out duties in good faith, with the care an ordinarily prudent person in a like position would believe are int he best interests of the corp.
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Resignation & removal
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Despite any contractual term to the contrary, an officer has the power to resign at any time by delivering notice to the corp. The corp has power to remove at any time.
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Indemnification of officers, directors, employees
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compensating, giving security or reimbursing for losses or damages sustained because of a 3rd party
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Mandatory indemnification
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Corp MUST indemnify a director or officer who PREVAILED on the merits of the action against him
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A corp does NOT have discretion to indemnify a director who is unsuccessful in defending
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1. a direct or derivative action in which the director is found liable to the corp or
2. an action charging the director received an improper benefit. |
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Corp procedure for fundamental changes
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1. board adopts resolution
2. written notice to SHs 3. SHs approve by a MAJ of votes ENTITILED to be cast 4. if changes in form of articles, are filed w/ the state |
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diff b/n SH voting on reg issues v fundamental changes
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MAJ of votes cast AT A MEETING v MAJ ENTITLED to be cast
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Merger
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blending of one corp into another corp. Later survives while merging corp ceases to exist following the merger.
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Share exchange
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one corp purchases all of the outstanding share or one or more classes or series of anothe corp
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Conversion
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one bus entity changing its form to another bus entity
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Merger is not a basic fundamental change if
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1. articles of incorp will not change
2. each SH will hold same # shares w/ same rights. 3. voting power of the shares issued as a result of the merger will comprise no more than 20% of voting power of shares of the surviving corp that were outstanding before the merger |
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Short form merger of subsidiary
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Parent corp owning at least 90% of outstanding shares of subsidiary may merge w/ itself w/o shareholder or director aproval.
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Sale of all or substantially all of corp's prop
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is a fundamental change for the corp disposing of the prop. If really a disguised merger, court may treat as a defacto merger holding purchaser liable for obligations of the disposing corp.
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right of appraisal or dissenters rights
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statutory right of SHs who oppose a fundamental change to have their shares judicially appraised & demand the corp buy them back at appraised value
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Procdure for exercising appraisal rights includes
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1. requirement corp notify SHs of any vote which will create dissenter's rights
2. SH must give corp written notice of intent to demand payment if vote exercised. 3. Corp must pay FMV 4. If corp does not pay what SH demand, CORP must file for court action to determine FMV. |
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tender offer
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public offer to buy a minimum # of shares directly from SHs at a fixed price, usu at a substantial premium over market $ in effort to take control of corp
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Tender offers are regulated by
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fed Williams Act
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Under the Williams Act, how is the bidder in a tender offer regulated?
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If offer will result in obtaining more than 5% of target co, bidder must file schedule 14D disclosure which includes extensive info about bidder, source of $ & plans concerning target.
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Under the Williams Act, how is offer regulated?
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1. tender offer must be open for at least 20 days & available to all SHs.
2. SHs must be permitted to w/draw while offer still open 3. If offer over subscribed, bidder must purchase on a pro rata basis. 4. If price increased, higher price must be paid to all tendering SHs. |
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Under the Williams Act, what is target corp required to do?
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give SHs a recommendation concerning offer or explain way it can't
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The Williams Act prohibits ________ in connection w/ tender offers
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false or misleading stmts or omissions
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Dissolution or liquidation of corp may occur in what 3 general ways?
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1. vol dissolution
2. administrative or state dissolution 3. judicial dissolution |
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Incorporators or initial directors can initial vol dissolution
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if shares have not yet been issued or bus has not yet started
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Corp. act may dissolve corp
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if approved under fundamental change procedure
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Judicial dissolution can be initiated through action of
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1. attorney general
2. SHs 3. creditors |
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Attorney general may seek action for judicial dissolution of corp on grounds that
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corp fraudulently obtained its articles or corp is exceeding or abusing its authority
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Grounds upon which SHs may seek action for judicial dissolution of corp include
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1. Deadlocked directors, SHs unable to break & threat of irreparable injury to corp
2. Directors have acted in illegal, oppressive or fraudulent manner 3, SHs are deadlocked & have failed to elect one or more directors 4. Corp assets are being wasted, misapplied or diverted for noncorp purposes. |
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Creditors may seek judicial dissolution if
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1. creditor's claim has been reduced to judment & corp is insolvent OR
2. corp admits in writing that creditor's claim is due & corp is insolvent. |
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Limited Liability Co characteristics
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1. taxed like a partnership
2. owners (called members) have limited liability like a corp's SH & 3. can be run like a partnership or corp 4. No limit on # of owners as there would be in S corp 5. no one has to assume full personal liablity as required in LP. |
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Professional corporations
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1. allow professionals to form corps to take advantage of fed provisions
2. limit share ownership to licensed professionals & 3. make it clear professional practicing in corp will still be personally liable for own malpractice despite corp form. |
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Generally, Rule 10B-5 is
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SEC rule that prohibits deceptive or manipulative practices in buying or selling of stocks
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Under 10B-5, private P must show
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1. fradulent conduct
2. in connection w/ purchase or sale of a security by P 3. interstate commerce 4. reliance 5. damages |
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Under 10B-5 fradulent conduct
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1. can take form of material misstatement or omission of material fact
2. materality = substantial liklihood reasonable investor would consider it important 3. scienter: intent to deceive, maniputlate or defruad. Recklessness as to truth also appears sufficient. |
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10B-5 also prohibits
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insider trading
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Insider trading is
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1. use of material, nonpublic info to trade the shares of a co by a corp insider or other person who owes a fiduciary duty (duty of trust & confidence) to the company
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Misappropriation theory
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broader definition of insider trading approved by SC under which government can prosecute a person under rule 10b-5 for trading on maket info obtain in breach of a duty of trust & confidence owed to the source of the info. (i.e. attorney of a CEO who learns corp is planning a takeover)
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Under 10b-5, who may be liable?
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1. insiders (officers, directors, controlling SHs, employees, CPAs, etc)
2. Tippers (if info disclosed for improper purpose) & tippees (if tipper breached duty & tippee knew it) 3. Misappropriators |
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Section 16B
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regulates short swing insider profits by requiring surrender of profits gained by insider of sale or purchase of stock of publicly held corp w/in 6 mo period.
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Purpose of 16B
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prevent unfair use of inside info & internal manipulation of price--why strict liability
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Elements of 16B cause of action
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1. purchase & sale or sale & purchase w/in 6 mo period
2. of equity security 3. by officer, director or more than 10% SH 4. profit is determined by matching the highest sales price against the lower purchase price for any six month period. |
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Diff b/n 10b-5 & Rule 16b action
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1. 10b-5 applies to all corps, 16b applies only to publicly traded corps
2. 10b-5 applies to all purchasers & sellers; 16b applies only to directors, officers, 10% SHs 3. 10b-5 requires a purchase or sale; 16B requires a purchase & a sale 4. 10b-5 requires intent to deceive; 16b no intent required 5. 10b-5 actions can be direct, derivative or SEC; 16b actions are only derivative. |
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Sarbanes-Oxley Act of 2002
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heightened standard of care & due diligence requirements for officers & directors of publicly traded corps.
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Sarbanes Oxley includes
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1. corporate responsibility for financial reports
2. forfeiture of bonuses & profits for any misconduct w/ respect to reports to SEC 3. prohibition of insider trading during period persons are participating in corp's pension plan 4. prohibition of personal loans to executives 5. imposes criminal penalties for fraud & destruction of corp audit records 6. whistle blower protection |
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Share exchange
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is not a fundamental change. Only the SHs whose shares will be acquired need approve.
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