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64 Cards in this Set

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Who are Promoters
Promoters are persons acting on behalf of a corporation NOT YET FORMED.
What is the Corporation's Liability on a promoter's Pre-incorporation Contracts?
The Corporation becomes liable on a promoter's pre-incorporation contract when the corporation ADOPTS the contract by: (1) Express board of directors resolution; OR (2) Implied adoption through knowledge of the prior contract and acceptance of its benefits (Same as ratification in agency)
What is the Promoter's Liability on Pre-incorporation Contracts?
Promoter REMAINS liable on pre-incorporation contracts until there has been a NOVATION - i.e., an agreement b/w the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract.
What happens if the promoter enters into a contract, and the corporation is never formed?
The promoter ALONE is liable on this contract.
What are Promoter's duties? And what are the remedies?
Promoters are fiduciaries with each other and corporation. - Therefore, promoters cannot make a SECRET PROFITS on their dealings with the corporation. Remedies: - If promoter sold assets to corporation that promoter acquired BEFORE becoming promoter: - Profit recoverable only if sold for MORE than FMV - If promoter sold assets to corporation that promoter acquired AFTER becoming promoter: - ANY profit recoverable by corporation
Who are Subscribers?
Persons or entities who make written OFFERS to buy stock from a corporation NOT YET FORMED.
Can you revoke a subscription agreement?
A pre-incorporation offer to buy stock in an unformed corporation is IRREVOCABLE for 6 months.
Who are the incorporators?
Incorporators must SIGN and FILE Articles of Incorporation w/ the state.
What are the Basic Formation Requirements for De Jure Corporate Status?
Articles must include: (A PAIN) (a) AUTHORIZED SHARES (maximum number of shares the corporation is authroized to issue.); (b) PURPOSE; (c) AGENT and address of registered office (the agent is corps. official legal rep) (d) INCORPORATORS; and (e) NAME of corporation (must contain some indicia of corporate status).
What is the Formation Requirement of Purpose?
The articles of incorporation must state the corporations purpose. A general purpose and a perpetual duration are valid, and will be presumed, UNLESS there is a specific purpose statement or limited duration.
What is the Ultra Vires doctrine? And what are the remedies for violation?
If the Articles of Incorporation contain a specific statement of purpose. Any corporate activity beyond that purpose is ultra vires: (1) the state can enjoin the ultra vires activity; and/or (2) corporation may sue its own Directors and Officers for losses caused by the ultra vires activity.
Are By-Laws required?
The Corporation NEED NOT adopt By-Laws. The Board has the power to adopt and amend the by-laws, unless the Articles give the power to the Shareholders.
What is the De Facto Corporation Doctrine?
A business failing to acheive De Jure Corporate status nonetheless is treated as a corporation if the organizers have made a GOOD FAITH, colorable attempt to comply with corporate formalities and have no KNOWLEDGE of the lack of corporate status.
What is the legal significance of formation of corporation?
(1) Corporation is a separate legal ENTITY. (2) Generally, Shareholders are not personoally liable for debts of corporation (princple of limited liability, which means shareholder only liable for the price of their stock).
What is Piercing the Corporate Veil, and how is it done?
GENERAL RULE: Shareholder not liable for the detbs of a corporation. EXCEPT: PCV to aviod fraud or unfairness. (1) Alter Ego Doctrine; OR - (i) X is a shareholder and controller; - (ii) Comingle Funds; OR - (iii) Failure to Observe Sufficient Corporate Formalities. (2) Undercapitalization. - (i) No insurance, - (ii) At intial formation of Corp - (iii) Failure to maintain sufficient funds to cover FORESEEABLE LIABILITIES NOTE: Courts are generally more willing to PCV for a tort victim than for a contract victim.
Do Foreign Corporations need to do anything specific in CA?
A corporation incorporated outside the state that wishes to engage in regular intrastate business must qualify by filing a CERTIFICATE OF AUTHORITY with the state that includes all the information required in the ariticles of incorporation.
What consideration must be received for the ISSUANCE of stock?
When the corporation issues stock, it must receive PAR VALUE, which is the minimum issuance price. No par means 'no minimum issuance price' and it can be any valid consideration received if deemed appropriate by the board of directors.
What is Treasury Stock?
Stock that was previously issued and had been reacquired by the corporation. It can then be re-sold. And does not need to follow the par-value requirements.
Is property an acceptable consideration for stock?
Any valid consideration may be received if the board of directors values the consideration to be in GOOD FAITH worth at least par value.
What are the consequences of issuing par stock for less than par value
(1)The DIRECTORS are liable to the corporation for authorizing a below par value issuance. (2)The SHAREHOLDER is liable for one thing only, to pay full consideration for shares. (3) The corporation has the election to sue either the directors or the shareholder, but the corporation cannot recover twice.
What are Pre-emptive Rights?
1. The right of an existing Shareholder to maintain her percentage of ownership by buying stock whenever there is a NEW ISSUANCE of stock for CASH. 2. PRESUMPTION: No pre-emptive Rights unless expressly granted in the articles of incorporation.
What are the Statutory Requriements regarding Directors?
(1) Corporations MUST have a Board w/ at least one Director; (2) Shareholders elect directors; (3) Shareholders can remove a director b/f her term expires w/ or w/o cause;
What is the Statutory Requriements for a Valid Meeting of Board of Directors?
(a) IN PERSON -- Unless all directors consent in writing to act w/out a meeting, a meeting is required; (b) NOTICE of directors' meetings can be set in By-laws; (c) PROXIES are NOT allowed; (d) QUORUM -- must have majority of ALL directors to take action (unless adifferent percentage is required in by-laws). (e) VOTE -- to pass resolution, however, all that is required is a majority vote of those PRESENT; (f) WRITING -- Each director is presumed to have concurred in Board action unless her dissent or abstention is recorded IN WRITING (i.e. in minutes or letter to corporate secretary).
What are the Directors Duties? (Basic Outline)
(1) Directors have a Duty to MANAGE the corporation. (2) They are protected from liability by the BUSINESS JUDGMENT RULE. (3) Directors, however, are FIDUCIARIES who owe the corporation duties of CARE and LOYALTY
What is the Director's Duty to Manage? And can it be delegated?
Directors have a duty to manage the corproation. Directors may delegate management functions to a committee of one or more directors that recommends action to the board.
What is the Business Judgment Rule?
In managing the corporation, the directors are protected from liability by the Business Judgment Rule. The BJR is a PRESUMPTION that the directors manage the corporation in GOOD FAITH and in the best interests of the corporation and its shareholders. As such, directors will NOT be LIABLE for INNOCENT mistakes of business judgment.
What is the Director's Duty of Care?
They must act w/ the care that a PRUDENT person would use w/ regard to their own business, UNLESS the Articles have limited director liability for a breach of the duty of care.
What is the Director's Duty of Loyalty? And how can it be protected?
A director may not receive an UNFAIR benefit to the detriment of the corporation or its shareholders, UNLESS: 1) there has been material DISCLOSURE; and 2) INDEPENDENT RATIFICATION; Unfair benefits include: (1) Self-dealing -- Director who receives an unfair benefit to herself in a transaction with her own corporation. (2) Usurping corporate opportunities -- director receives an unfair benefit by usurping for herself an opportunity which the corporation would have pursued.
In what ways can a director seek ratification for a duty of loyalty claim?
RATIFICATION: Directors may defend a claim of breach of the duty of loyalty by obtaining INDEPENDENT ratification through: (a) a majority vote of INDEPENDENT Directors; (b) Majority vote of a committee of at least 2 INDEPENDENT directors; OR (c) Majority vote of shares held by INDEPENDENT shareholders
What duties do Officers owe? Who are they? And how are they chosen?
(1) Owe same duties of care and loyalty as directors. (2) Are AGENTS of the corp. and bind the corp. by their authorized activities. (3) Corporations must have a President, Secretary, and Treasurer. (4) Directors have virtually UNLIMITED power to select officers, and may REMOVE them from office at ANY time - but the corp. will be liable for breach of contract damages.
May an Officer or Director seek reimbursement from the corporation for defending themselves?
(1) Corporation may NEVER indemnify a director who is held liable to its own corporation. (2) Corporation MUST ALWAYS indemnify if the director or officer wins (3) Corporation MAY indemnify if: (Permissive Indemnity) . (a) Liability to 3rd parties or settlement w/ the corp; or . (b) Director or Officer shows they acted in Good Faith and believed conduct was in the corp.'s best interest.
Who may determine whether to grant permissive indemnity?
(1) If approved by a majority of independent directors; (2) If a committee of at least 2 independent directors approve it; (3) a majority of shares held by independent shareholders vote for it; (4) a special legal counsel recommends it (you will get it) 1-3 are just copies of the ratification defense to the breach of loyalty
What duties do shareholders owe to the corporation? This was not in the lecture, but has come up in essays.
Generally: Shareholders owe NO duty to the corporation. Exceptions: 1) Shareholder agreement - Shareholder contracts to manage a portion of corporation. . a) Will owe duties of a similar officer. 2) Close Corporations . a) Shareholders generally owe same duty to each other as that of partners. 3) Controlling Shareholders - Can be the largest shareholder by a significant amount. . a) Must refrain from using his control to take action that unfairly prejudices minority shareholders. (i.e. Selling to looters)
What are the Basic Shareholder Rights? (Outline)
(1) Derivative Suits (2) Voting (3) Examine the Books and Records (4) Dividends
What is a Derivative Suit?
In a derivative suit, a shareholder is suing to enforce the corporation's cause of action.
What are the requirements for bringing a derivative suit?
Two Requirements to have standing: (1) CONTEMPORANEOUS STOCK OWNERSHIP of at least one share when the claim arose and throughout the entire litigation; AND (2) MUST MAKE A DEMAND ON DIRECTORS that they cause their own corproation to bring suit and the demand must either be rejected or at least 90 days have passed since demand was made.
Who has the right to vote at a shareholders meeting?
Only the record date owners can vote. The record date owner is the holder of the stock on the record date, which is the voter eligibility date set by the board up to 70 days prior to the meeting.
What are the Shareholder voting by proxies requirements?
A proxy is: (i) a WRITING (fax or email generally valid); (ii) that is SIGNED by the record shareholder; (iii) directed to SECRETARY of corp.; (iv) AUTHORIZING another to vote shares; AND (v) is VALID for only 11 months.
Can you revoke a Proxy?
Proxies are Freely Revocable, UNLESS BOTH: (1) they say IRREVOCABLE on them; AND (2) They are COUPLED with an interest
What types of Shareholders Meetings are there? What are the requirements?
(1) Properly noticed SHAREHOLDER MEETING -- every corp. must have an annual meeting at which at least one director slot is open for election and the the time and place must be in notice. (2) Specially noticed SPECIAL MEETING (called by board, the president, or the holders of 10% of voting shares) -- Its to vote only on a proposal of a fundamental corp. change. Requires: . (i) They require special notice. . (ii) Notice must contain the PURPOSE of the special meeting. . - If not stated in notice, it cannot take place at the meeting and is void.
What is the Quorum requirement for Shareholder Meetings?
A quorum requires a majority of oustanding SHARES to be represented, in person or by proxy, when the meeting begins, unless otherwise provided in Articles. - Note shares not shareholders
What percent vote is needed to pass a shareholder vote?
If a quorum is present, the action is approved if the votes cast in favor of the proposal exceed the votes cast against the proposal.
What is Pooled or Block Voting?
Shareholders who own relatively few voting shares can increase their influence by agreeing to vote alike. They can do this through: (1) Voting Trusts; OR (2) Shareholder Voting Agreements.
What are Voting Trusts and requirements?
A formal delegation of voting power to a Voting Trustee. (a) Written trust agreement; (b) Typically filed w/ corporation; (c) transfer shares to voting trustee; (d) shareholders get trust certificates; AND (e) shareholders retain all rights except voting; (f) DURATION - GENERALLY 10 YRS unless extended by agreement.
What are Shareholder Voting Agreements and what are the requirements?
Agreement in writing, to vote shares as required in that WRITING, and now is binding on all signors, and w/ no time limit and no filing required.
What is traditional or Straight Voting for directors?
Each shareholder can cast a number of votes equal to the number of shares they own FOR EACH OPEN SLOT - i.e. each open slot is a different election.
What is Cumulative Voting for Directors?
Number of votes = #Slots x #Shares. - i.e. all slots are treated as one election in which a shareholder has a number of votes equal to their shares multiplied by the number of open slots.
When does cumulative voting or traditional (straight) voting apply?
PRESUMPTION: No right to cumulative voting unless the right is granted in the articles.
What are the rights of the Shareholders to examine the books and records of the corporation?
Any shareholder shall have access upon notice and at proper times
What are the shareholders rights to Dividends? And the directors liability?
(1) To be declared in Board's DISCRETION, unless the corporation is insolvent or would be rendered insolvent by the dividend. . (a) NOTE: This means NO shareholder RIGHT to dividends (2)Board members are liable personally for unlawful distributions, but have a defense of good faith reliance on the financial officer's representations regarding solvency.
What are the classes of Priority of Dividend Distribution?
1) Common stock is paid equally and paid last. 2) Preferred is paid first. 3) Participating is paid twice. 4) Cumulative add up.
What are the requirements for shareholder agreements to eliminate Corporate formalities (Closely-held corporations)? And what is the result?
REQUIREMENTS: (1) Unanimous S/H election in the Articles, bylaws, or in a filed written agreement; AND (2) There must be a reasonable share transfer restriction to maintain closely held. RESULT: (1) No PCV for failure to maintain corp. formalities, AND (2) possible sub chapter S status (S-Corp -- treated as a partnership for tax purposes).
What are S-Corp Requirements?
No more than 100 American Resident shareholders and no more than one class of stock.
What is a Professional Corporation? And what are the requirements?
Licensed Professionals (i.e. lawyers, accountants, medical professionals) may incorporate as 'PC'. Requirements: (1) Organizers file articles w/ name designated 'Professional Corporation' or 'PC' (2) Shareholders must be licensed professionals. (3) Corproation may practice only ONE designated profession. (4) Professionals are liable personally for their own malpractice. (5) But, the professionals are NOT liable personally for each other's malpractice or the obligations of the corporation itself.
What are the Recognized Fundamental Corporate Changes?
(1) Merger, Consolidation, and Dissolution 2. Fundamental (not ministerial) Amendment of the Articles; or Sale (not purchase of substantially all of the corporation's assets.
What are the Procedural Steps for Fundamental Corporate Changes?
(1) Resolution by Board at a valid meeting.; (2) Notice of Special Meeting; (3) Approval by MAJORITY of: . (a) all shares entitled to vote; AND . (b) any voting group adversely affected by the change . (c) NO APPROVAL necessary for 'short form' merger where parent corp. who owns 90% or more of subsidiary merges w/ subsidiary.; (4) Possibility of dissenting shareholder right of appraisal . (i) shareholder who does not vote in favor of a fundamental change has the right to force the corp. to buy her shares at fair value.; SEE perfecting right of appraisal (5) File notice w/ the state (i.e. articles of merger)
What must a shareholder do to perfect her right of appraisal?
(1) Actions by Shareholder to perfect right: . (a) B/f vote, file written notice of objection and intent to demand payment; . (b) do not vote in favor of the proposed change; . (c) make prompt written demand to be bought out; (2) If the shareholder and the corporation cannot agree on fair value. . (i) The court has the power to appoint an expert appraiser to value the shares and the appraisal is binding on the parties.
What are the requirements of the Anti-Fraud, Section 10(b), of the Securities Exchange Act of 1934?
Requirements: (1) Scienter -- Intent to deceive; (2) Deception -- Material misrepresentation or misappropriation of material nonpublic information (i.e. trading on or tipping inside information); (3) In connection with the ACTUAL purchase or sale of securities.
What is Insider Trading under SEC 10b-5? This was not in the lecture, but has come up in essays.
Occurs where an individual with a duty breaches by trading or disclosing on material inside information. 1) Duty - The following people have a duty to remain quiet: . a) Insiders - Directors, Officers, Controlling Shareholders, Employees, Outside Agents(CPAs, Attorneys, Bankers) 2) Material information - Information that an investor would think is important when deciding whether or not to invest. 3) Non-public - Information not yet disclosed to the public at large. Tipper - An insider may be liable for merely giving inside information if it was made for an IMPROPER PURPOSE. Tippee - Can be liable only if tipper breached a duty and tippee KNEW that tipper breached a duty.
When does the Short-Swing trading profits, Section 16(b), requirement apply?
(1) REPORTING CORPORATION -- . (i) listed on a national exchange or . (ii) at least 500 shareholders and $10 million in assets.; (2) Officer, Director, or 10% S/H (3) SHORT-SWING TRADING: Transaction involving the buying and selling of stock w/in a single six-month period ***Fraud is NOT Required ** ** NO Requirement of Inside Information*****
What happens if there is a violation of the Short-Swing trading profits, Section 16(b)?
All 'profits' from such 'short-swing trading' are recoverable by the corproation.
How does the Sarbanes-Oxley Act of 2002 work?
(1) Reporting corporation; (2) CEO and CFO must CERTIFY that based on the Officer's KNOWLEDGE, reports filed with the SEC: . (i) do not contain any material misrepresentations or omissions, AND . (ii) fairly present the fianancial position of the company.; (3) Willfully certifying a false report could bring $5 million fine and 20yrs;
What remedies exist if false reports have to be restated under the Sarbanes-Oxley Act?
If false reports have to be restated, the corporation (directly or derivately) may recover Officer's profits made from trading the company's securities w/in 12 months after the false reports were filed, and may recover incentive-based compensation received during that period.
What is the Sarbanes-Oxley Act of 2002 'black out' period?
Corporations (directly or derivatively) may also recover any profits made by officers from trading corporations's stock during 'black out' periods of at least 3 days when at least 50% of the employeees are prohibited from trading in their retirement plan's securities.