Corporations 2009

Front 1

Corporations:
What are the five typical fact patterns that you will likely have to address when answering a corporations question?

Back 1

1) Organization of corporation
2) Issuance of stock
3) Directors and officers
4) Shareholders
5) Fundamental corporate changes

Front 2

Corporations:
When is a corporation subject to the Texas Business Corporation Act ("TBCA")? The Texas Business Organizations Code ("TBOC")?

Back 2

If formed before 2006, it is governed by the TBCA. If formed on or after January 1, 2006, it is governed by the TBOC.

Front 3

Corporations:
What information must be present on a Certificate of Formation?

Back 3

1) Corporate Name (must include Corp., Co., or Inc);
2) Name and address of each organizer;
3) Number of initial director(s);
4) Name of the corporate agent
5) Statement of purpose
6) Capital structure (authorized stock, number of shares per class and information on par value, voting rights and preferences of each class)

Front 4

Corporations:
What must a corporation do if it does business under a name other than that in the certificate?

Back 4

It must file an assumed name certificate with the Secretary of State ("SOS") and the county clerk in the count of its registered office and its principal office. Cannot sue in Texas until it does so, but can be sued.

Front 5

Corporations:
What are the elements of the De Facto Corporation Doctrine, and what is it's status in Texas?

Back 5

1) There must be a relevant incorporation statute; 2) the parties made a good faith, colorable attempt to comply with it; and 3) some exercise of corporate privileges. If applicable, treated as a corporation for all purposes except in an action by the state. This doctrine may be abolished under Texas law.

Front 6

Corporations:
Under the Corporation by estoppel doctrine...

Back 6

One dealing with a business as a corporation, treating it as a corporation, may be estopped from denying the business's corporate status. This doctrine may be abolished under Texas law.

Front 7

Corporations:
Where a certificate of incorporation is silent on whether common stock holders have preemptive rights, what is the law on whether they exist or not?

Back 7

If the corp. was formed before 9/1/03, there are preemptive rights. If formed on or after that day, there are not any.

Front 8

Corporations:

Certificate is silent about the duration of incorporation.

Back 8

Presume perpetual existence.

Front 9

Corporations:

Statement of purpose.

Back 9

Must be included on certificate. Can be a general statement that corp. will engage in all lawful activity after first obtaining necessary state agency.

Front 10

Corporations:

How do we handle ultra vires today?

Back 10

1) UV K's are valid; 2) SH's can seek an injunction; 3) responsible managers are liable to the corp. for UV activity losses.

Front 11

Corporations:

What are:
Authorized stock
issued stock
outstanding stock

Back 11

-maximum # of shares the corp. can sell
- shares the corporation actually sells
- shares that have been issued and not reacquired by the corp.

Front 12

Corporations:

What info must be included on certificate regarding stock?

Back 12

authorized stock, # of shares per class and information on par value, voting rights and preferences of each class

Front 13

Corporations:

When the Sec. of State files your certificate and sends acknowledgment of filing to corp., what do you have?

Back 13

De jure corp.

Front 14

Corporations:

What takes place at the board's organizational meeting?

Back 14

Directors select officer, adopt bylaws and transact company biz.

Front 15

Corporations:

Legal significance of formation of a corp.

Back 15

Internal affairs of a Tex. corp. are governed by Tex. law; corp. becomes a separate legal person. Generally, corp., not SHs and directors, are liable for debts, torts, and breaches of K's of corp.

Front 16

Corporations:

Who adopts bylaws? Who can repeal, amend, or adopt new bylaws?

Back 16

-the board
- board or SH's, unless certif. reserves power to SH's exclusively or unless SH's in adopting a particular bylaw provide expressly that directors cannot repeal or amend.

Front 17

Corporations:

Certif. vs. bylaws?

Back 17

Certif. wins. Bylaws can change the number of directors however.

Front 18

Corporations:

What is a promoter?

Back 18

Person acting on behalf of a corp. not yet formed. (typically enters into K's)

Front 19

Corporations:

Is a corp. liable on pre-incorp. K's?

Back 19

Not until a corp. adopts the K. Adoption can take place via board action or if the corp. accepts a benefit of the K.

Front 20

Corporations:

Is the promoter liable on pre-incorp. K's?

Back 20

Generally, unless the K clearly provides otherwise, the promoter remains liable until there has been a novation. Adoption makes the corp. liable too, but does not relieve P, unless the K states otherwise.

Front 21

Corporations:

If in a fact pattern, a corp. is selling its own stock, what must you discuss?

Back 21

Issuance of stock.

Front 22

Corporations:

What is a subscription?

Back 22

Written, signed offer to buy stock form corp.

Front 23

Corporations:

For how long is a preincorp. subscription irrevocable?

Back 23

6 months - unless it says otherwise or unless all subscribers agree.

Note: POST-incorp. subscriptions are revocable until acceptance, i.e., the board accepts the offer.

Front 24

Corporations:

When does a subscriber whose subscription has been accepted become a SH?

Back 24

When he pays for the stock.

Front 25

Corporations:

Treasury stock?

Back 25

Stock that was previously issued and has been reacquired by the corp. The corp. can resell. You treat as not par.

Front 26

Corporations:

Who should be liable when creditors want to recover "water" from watered stock?

Back 26

Directors if they knowingly authorized the issuance; purchaser (no defense - charged with notice of par value). 3rd party transferees are not liable if they did not know about the water.

Front 27

Corporations:

Preemptive right?

Back 27

Right of an existing SH of common stock to maintain % of ownership by buying stock whenever there is a new issuance of stock for money.

Front 28

Corporations:

Statutory requirements regarding directors?

Back 28

1) One or more adult natural persons; 2) SH's elect directors at annual meetings; 3) can be removed before term expires by SH's (requires vote of a majority of shares entitled to vote; no cause needed); board of SH fills vacancies on board.

Front 29

Corporations:

What are the 2 ways a board can act?

Back 29

1) unanimous written consent (email and fax OK) to do something; 2) a meeting that satisfies quorum and voting requirements

Front 30

Corporations:

Describe notice requirements for board/SH meetings?

Back 30

Notice is not required for regular meetings but is for special meetings

Front 31

Corporations:

Can directors give proxies or enter voting agreements for how they will vote as directors?

Back 31

No. These are void. No such thing as a proxy for director voting or voting agreements amongst directors.

Front 32

Corporations:

What is a quorum?

Back 32

to do business at a meeting, we must have a majority of all directors (unless a different percentage is required in the certif. or bylaws). Quorum present = only a majority vote of those present to take action.

Front 33

Corporations:

Can we lose a quorum if directors leave the meeting?

Back 33

Statute suggests yes, but there is no case law, so there is uncertainty.

Front 34

Corporations:

Role of directors, generally.

Back 34

Manage biz of corp. set policy, supervise officers, declare distributions, decide when the corp. should issue stock, recommend fundamental changes to SH's, etc.

Front 35

Corporations:

What are acceptance to the general role of dirctors?

Back 35

Close corps.; SH agreements; committee of one or more directors

Front 36

Corporations:

Describe duty of care standard.

Back 36

A director owes the corp. a duty of care. Must act in good faith and exercise ordinary care and prudence. Must do what a prudent person would do in similar circumstance. Burden on plaintiff to prove breach.

Front 37

Corporations:

What are the two types of actions that may show a breach of duty of care?

Back 37

Nonfeasance and misfeasance.
NF: only liable if doing nothing caused a loss to corp.
MF: not liable if director meets the biz judgment rule.

Front 38

Corporations:

What is the biz judgment rule?

Back 38

Court will not 2nd guess a biz decision if it was made in good faith, was informed, and had a rational basis.

Front 39

Corporations:

Describe the duty of loyalty standard?

Back 39

A director owed the corp. a duty of loyalty. Must act in good faith and with a reasonable belief that what he does in the corp.'s best interest.

Front 40

Corporations:

How do you spot a duty of loyalty ??

Back 40

Look for a conflict of interest to arise between the director and the corp. Duty will be on director to show that director did not breach.

Front 41

Corporations:

What is an interested director transaction?

Back 41

any deal between the corp. and one of its directors, or another biz of the director's.

Note: Interested directors count toward quorum. Also, board can set own compensation unless it is excessive and constitutes waste. This would be a breach of the DOL

Front 42

Corporations:

Interested director transactions will be set aside UNLESS the director shows what?

Back 42

that 1) the deal was fair to the corp. when approved; OR, 2) her interest and the material facts were disclosed or known and the deal was approved in good faith by either of these: a) majority of the disinterested directors; or b) the SH's

Front 43

Corporations:

Can a director start his/her own venture that directly competes with the corp?

Back 43

To answer this ?, you would first state the duty of loyalty standard, then "a director cannot compete without approval form the disinterested directors."

Front 44

Corporations:

What is the remedy for a director's breach of its duty of loyalty via its participation in competing venture?

Back 44

Constructive trust on profits. Corp. would get the profits.

Front 45

Corporations:

What is a director usurps a corporate opportunity?

Back 45

First state DOL standard. Then, "A director cannot usurp a corporate opportunity. That means the director cannot take it until he 1) tells the board and 2) waits for the board to reject the opportunity.

Front 46

Corporations:

What is a corporate opportunity?

Back 46

Anything the director has reason to know the corp. would be interested in. If usurping director hold on to corp. opportunity must sell it to corp. at his cost, or if he makes profit from it, constructive trust in favor of corp.

Front 47

Corporations:

What are some other bases of director liability?

Back 47

1) Ultra vires acts; 2) improper loans; 3) improper distributions

Front 48

Corporations:

How do we know if a director should be held liable if such liability arises?

Back 48

Presumed to have concurred with board action unless dissent or abstention is noted in writing in corp. records. This is done by having it put in the minutes, or sending note to the corp. secretary at the meeting, or sending a registered letter to the corp. secretary immediately after the meeting. ORAL DISSENT IS NOT EFFECTIVE BY ITSELF.

Front 49

Corporations:

Generally, if you voted for a resolution as a board member, you cannot dissent. What are the exceptions?

Back 49

1) Absent directors are not liable; 2) GOOD FAITH reliance on financial statements or other information represented as correct by an officer or on information provided by a competent professional.

Front 50

Corporations:

What duties do officers owe to a corp?

Back 50

same duties of loyalty and care as directors. if discussing conduct of officers, use same standards. Also, watch for crossover with agency.

Front 51

Corporations:

When is a corp. required to indemnify a director of officer who incurred costs in their capacity?

Back 51

If the director/office wins a judgment on a case where they were sued in their capacity.

Front 52

Corporations:

When is reimbursement prohibited?

Back 52

If the director/officer is held liable for willful or intentional misconduct in performing a duty to the corp.

Front 53

Corporations:

When is reimbursement of a director/officer permitted?

Back 53

Must show that he acted in good faith and with the reasonable belief that his actions were in the corp.'s best interest. This is determined by a maj. vote of disinterested directors, committee, or shares, or independent legal counsel. If held liable to the corp. reimbursement is limited to expenses and attorney's fees.

Front 54

Corporations:

The certif. can limit or eliminate director and officer liability for damages, but never for willful or intentional misconduct.

Back 54

ALWAYS mention this fact.

Front 55

Corporations:

What is the procedure required in which a corp. can advance litigation expenses to a director or officer?

Back 55

The O/D must give an affidavit of her good faith belief that she has net the standard for indemnification and a written undertaking to repay the expenses if it is determined that she did not.

Front 56

Corporations:

Generally, SH's do not manage the corp., but can a closely held corp. What are the characteristics of a closely held corp.?

Back 56

Few SH's; stock is not publicly traded.

Front 57

Corporations:

What are the two ways that SH's in a close corp. can abolish the board and take over management?

Back 57

1) certif. must provide that is is a close corp. and certif. or unanimous SH agreement provides for SH management; 2) if not listed on a national exchange or maket, the certif., or bylaws, or unanimous SH agreement can govern almost any aspect of corp. powers. Note that managing SH's owe fiduciary duties just like board.

Front 58

Corporations:

When you see SH oppression (freez-outs or selling corp. assets or control to one who loots corp.) in a close corp. what must you discuss in your answer?

Back 58

In a Texas close corp., SH's do not owe each other fid. duties as a matter of law. But a court may impose them depending on the circumstances.

Front 59

Corporations:

In what cases might a court pierce the corporate veil (PCV) and hold SH's personally liable?

Back 59

1) If they have abused the privilege of incorporation; and 2) fairness requires it (to prevent fraud or achieve equity)

Front 60

Corporations:

REMEMBER: Texas courts generally may be more willing to PCV for a tort victim than for a contract claimaint.

Back 60

Also, cannot PCV for a contract claim based on fraud unless the SH made the corp. commit fraud for his own personal benefit. Watch for PCV in a related corporate situation - e.g. where a parent corporation forms a subsidiary to avoid obligations (PCV of sub and sue parent)

Front 61

Corporations:

What are the two classic fact patterns that lead rise to PCV issues?

Back 61

alter ego theory and undercapitalization theory

Front 62

Corporations:

What ? must you ask first to determine if a suit is a derivative suit?

Back 62

Could the corp. have brought this suit? If so, it is probably a derivative suit.

Front 63

Corporations:

What happens if a SH wins a derivative suit?

Back 63

Corp. gets damages because it is its claim, not SH's. SH gets costs and attorney's fees (usually from the corp.) If SH loses, no costs or atty's fees. SH might even be liable to defendant's atty's fees if he sued without reasonable cause.

Front 64

Corporations:

What are the req's for bringing a SH derivative suit?

Back 64

1)Stock ownership at a particular time (when the claim arose or have gotten it by operation of law from someone who did); 2) must fairly and adequately represent the corp.'s interest; 3) must make a written demand on directors that the corp. bring suit (90 days)

Front 65

Corporations:

What are the req's for bringing a SH derivative suit? (cont.)

Back 65

4) Corp. must be joined as party to case. (joined as defendant)

Front 66

Corporations:

What is the basis of a corp's motion to dismiss a derivative action?

Back 66

Where independent and disinterested directors (or a committee of two or more of such directors) has determined that the suit is not in the corporation's best interest (low chances of success; costs of suit would exceed recovery)

Front 67

Corporations:

In ruling on the motion to dismiss derivative suit, what will the court consider?

Back 67

The court must dismiss if it finds the corp.'s motion was made in good faith by disinterested directors.

Front 68

Corporations:

In a close corporation of 35 or fewer SH's how may a court treat a derivative suit.

Back 68

As a direct action. Consequently, the various requirements don't have to be met. Treating as a direct suit means the recovery would go to the plaintiff, not the corp.

Front 69

Corporations:

Generally, the record shareholder as of a record date has the right to vote. How are these determined?

Back 69

the record SH is the person shown as the owner in the corporate records. the record date is a voter eligibility cut-off set no more than 60 days before the meeting.

Front 70

Corporations:

Exceptions to the general rule that the record owner on record date votes.

Back 70

The corp. does not vote treasury stock even if it was the record owner on the record date; death of SH; proxies

Front 71

Corporations:

What is a proxy?

Back 71

A writing signed by record SH directed to secretary of corp., authorizing another to vote the shares.

Front 72

Corporations:

When is a proxy irrevocable?

Back 72

When it is coupled with an interest. This requires the proxy say it's irrevocable and the proxyholder has some interest in the shares other than voting.

Front 73

Corporations:

Requirements for voting trust.

Back 73

Written trust agreement controlling how the shares will be voted; copy to corporation; transfer legal title of shares to voting trustee; original SH receives trust certificates and retains all SH rights other than voting.

Front 74

Corporations:

Requirements for voting agreement.

Back 74

In writing, and copy to corp.

Remember: Voting trusts and agreements must be for a proper SH purpose. It is OK for SH's to agree to vote to elect each other as directors.

Front 75

Corporations:

Are voting agreements specifically enforceable against transferrees?

Back 75

yes if the affected stock certificates conspicuously note the agreement.

Front 76

Corporations:

Where do SH's vote?

Back 76

1) unanimous consent in writing and signed or by electronic transmission of holders of all voting shares (can be less than unanimous if certif allows); 2) a meeting that satisfies quorum and voting rules.

Front 77

Corporations:

What are the 4 basics steps in a fundamental corporate change?

Back 77

1) board adopts resolution of a fund. corp. change; 2) board must submit proposal to SH's with written notice at least 21 days before SH meeting; 3) change must be approved by SH by 2/3 of shares entitled to vote; 4) usually, a document is delivered to Sec. of State for filing.

Front 78

Corporations:

What are appraisal rights?

Back 78

Right of a SH to force corporation to buy her shares at fair value. It's the exclusive remedy unless there is fraud. If there is a right of appraisal, the notice to SH (of fundamental change resolution) must say so)

Front 79

Corporations:

When will a SH have a dissenting SH right of appraisal?


(only in close corps.)

Back 79

1) Actions by corp. trigger right (merger, sale of shares in a share exchange; transfer of substantially all assets); 2) actions by SH to perfect the right

Front 80

Corporations:

Describe the process by which a SH may perfect the right to appraisal?

Back 80

Before SH vote, file with the corp. written notice of objection and intent to demand payment; abstain or vote against the proposed change; and, after the vote, w/in 20 days of notification by corp. make written demand to be bought out. Corp. must notify whether it accepts or rejects demand w/in 20 days. If they reject, they counter with estimate of fair value. If not agreement on fair value, S sues for determination of fair price.

Front 81

Corporations:

What's required for amendment of certif.?

Back 81

board action and SH approval

Front 82

Corporations:

What if an amendment to the certif. affects a class of shares (e.g. increases or decrease the # of that class's shares)?

Back 82

It must be approved by 2/3 of the shares in that class, as well as by 2/3 of all shares entitled to vote.

Front 83

Corporations:

Describe what's needed for a merger?

Back 83

1) board action (of both corps.); 2) SH approval (both corps. usually); 3) no SH approval required if a 90% or more owned sub. is merged into parent (short-form merger); 3) if approved, delver certif. of merger to SOS; 5) dissenting SH right of appraisal; 6) surviving entity succeeds to all rights and libs. of the constituents.

Front 84

Corporations:

What is required for voluntary termination?

Back 84

Written consent of all SH; or board action approved by 2/3 SH entitled to vote; after either of these, send notice of intent to wind up to creditors; liquidation; court can revoke termination if corp. was terminated as a result of fraud. Corp. may revoke anytime before existence ceases.

Front 85

Corporations:

Involuntary (court ordered) termination?

Back 85

Texas AG can institute proceeding for involuntary termination and winding up for fraudulent procurement of certif; ultra vires activity; misrep. in required in reports; or public interest concerns.

Front 86

Corporations:

Rights of creditors regarding termination?

Back 86

Can seed immediate termination based on irreparable harm to unsecured creditors; can seek appt. of receiver because the corp. is insolvent and the creditor has an unsatisfied judgment or the company admits in writing that the amount is due.

Front 87

Corporations:

When can a SH seek appt. of a receiver?

Back 87

Insolvency; waste of assets; director deadlock causing irreparable harm to the corp.; SH deadlocked and have failed to have 2 annual meetings to fill vacant board position; or illegal, oppressive, or fraudulent acts by directors.

Front 88

Corporations:

How long does a receiver serve?

Back 88

12 months. If things aren't fixed by the end of 12 months, court can order termination.

Front 89

Corporations:

Describe administrative termination.

Back 89

SOS may issue a certificate of termination for corp,'s failure to pay franchise tax or failure to maintain registered agent or to file required reports. No court action needed.

Front 90

Corporations:

How many days notice does a corp. get for administrative termination. Why are directors nervous about this type of termination?

Back 90

90 dyas. Because D/O are personally liable for debts incurred w/their knowledge including franchise taxes.

Front 91

Corporations:

What are the steps in a liquidation process?

Back 91

gather all assets, convert to cash, pay creditors, and distribute to SH, pro-rata by share unless there is a liquidation preference.

Front 92

Corporations:

How late can claims against the corp. that arose before termination be asserted?

Back 92

W/in 3 years after termination.