Corporations

Front 1

Bylaws

Back 1

1. May include provisions for the mgmt of business and conduct of affairs of corp that are not inconsistent with law or articles
2. The power to alter, amen or repeal bylaws or adopt new laws is vested in the board of directors unless reserved to shs by articles

Front 2

De jure corp

Back 2

- A corp organized in substantial compliance with the statute is a de jure corp
- Failure of organizer to comply with a mandatory statutory provision will preclude de jure status

Front 3

De facto corp

Back 3

If statutory compliance is insufficient for de jure status, a de facto corp may still have been formed if:

1) A good faith, colorable (substantial) attempt was made to comply with the inc statute;
2) It had a legal right to inc and
3) The corporate principals in good faith acted as if they were a corp

Front 4

De facto corp: effect on liability

Back 4

De facto status insulates directors and shs from liability except in a direct action by the state

Front 5

Corporation by estoppel: creditor is estopped

Back 5

If a creditor always dealt with the principals as if they were a corp, he will be estopped from later alleging the corp is defective if the would unjusltly harm the principals

Front 6

Corporation by estoppel: d corp is estopped

Back 6

In the same manner, a d who has held itself out to be a corp cannot avoid liability by claiming p has no coa bc d is n ot a legal entity

Front 7

Piercing the corporate veil: definition

Back 7

Even if a corp is properly formed, under the circumstance, a ct may disregard the corp’s separate entity and hold the shs personally liable on corp obligation

* Resorted to only when necessary to avoid grave injustice
* It is rare for a ct to pierce the corp veil where the corp is publicly held

Front 8

Alter ego: unity of interest

Back 8

In determining whether to disregard the corp entity in a particular case, the entity may be disregarded where there is such unity of interest and ownership that the separate personalities of the corp and the individuals no longer exist

Front 9

Alter ego--to pierce the corp veil, a p must prove:

Back 9

1) Sh controlled the corp ti such an extent that corp was not treated as a separate entity and the sh was in fact the alter ego fo the corp and

2) To limit the claim as only against the corp would sanction a fraud or promote injustice

Front 10

Piercing the corp veil: Failure to comply with corporate formalities

Back 10

One of the most common justifications for piercing the corp veil:
1) Failure to hold director or sh meetings
2) Failure to maintain separate corp and financial records
3) Commingling funds
4) Failure to issue stock

Front 11

Piercing the corp veil: Inadequate capitalization

Back 11

Inadequate capitalization alone will not ordinarily lead to disregarding corp entity IF the corp formalities are carefully observed

Front 12

Piercing the corp veil: Adequate capital generally must be sufficient for:

Back 12

1) Corp’s prospective needs and
2) Meeting corp debts as they become due

* A subsidiary’s capital must be sufficient to allow it financial independence from the parent corp

Front 13

Piercing the corp veil: shareholder Liability

Back 13

a. If corp veil is pierced, liability is generally imposed upon shs active in mgmt

b. Liability is for the full amt of the debt—not merely amt that would have constituted adequate capital

Front 14

Promoter: definition

Back 14

- A promoter is one who causes a corp to be formed, organized and financed

- Promoter's function is to set up the corp and establish it on firm footing

Front 15

Promoter liability for breach of fid duty

Back 15

Corp may either:
1) Avoid the txn or
2) Hold promoter liable for the secret profits

Front 16

Preincorporation contracts: liability of promoter

Back 16

a. Promoter is personally liable on any k he entered into on behalf of not yet existent corp

b. Whether the k is made in his name or the corp’s

Front 17

Preinc ks: exception to promoter liability

Back 17

Exceptions:

1) Other contracting party agrees that promoter will not be liable

2) Circumstances demonstrate that the other party looked only to the corp for performance

Front 18

Promoter personal liability will continue even after the corp is formed unless there is:

Back 18

a. A novation or
b. An agt to release liability

Front 19

Promoter Indemnification

Back 19

Even if promoter is held liable on the k, he may be entitled to indemnification by the corp if he undertook the k in good faith and corp benefitted from the k

Front 20

Promoter ks: adoption

Back 20

Promoter may remain liable on the k with the 3p, but will be entitled to indemnification from the newly created corp

1) Express: where th e k is explicitly approved or adopted by the board

2) Implied: where corp accepts or acknowledges the benes of the k in some manner

Front 21

Promoter ks: novation

Back 21

Novation: where all parties agree to substitute liability of the corp for that of the promoter whereby promoter is discharged

Front 22

Acceptance of benefits

Back 22

- A corp may become bound to fulfill a k made in its name and on its behalf in anticipation of its existence by afterwards acting the benes of the k

- Corp is deemed liable on a quantum meruit or quasi-k rationale

Front 23

Liability of the 3p

Back 23

- Corp cannot later claim the benefits of a promoter’s k with the 3p unless the other party accepts performance by the corp
- The promoters usually can still enforce the k
- If the corp assumes liability for promoter's k, it can enforce the k
- Upon adoption, a corp may enforce the k directly against the 3p

Front 24

Subscription for shares

Back 24

a. A person may become a sh of a corp by agreeing to purchase shares pursuant to a subscription for shares either before or after inc
b. A subscription is in essence a k to buy shares that will be issued

Front 25

A preinc subscription for shares is irrevocable for...

Back 25

six months, unless the subscription agt proveds otherwise or all subscribers agree to revocation

Front 26

If a subscriber defaults the corp may:

Back 26

1) Treat the subscriber as a debtor of the corp and collect from him or
2) Rescind the agt and sell the shares

Front 27

Debt securities: defined

Back 27

Represent money loaned to the corp and a person holding debt securities is a creditor of the corp

Front 28

Holders of debt securities:

Back 28

a. have priority over equity security holders upon liquidation of the corp but
b. do not ordinarily have the right to vote

Front 29

Three major kids of debt securities:

Back 29

Debentures: unsecured obligations of the corp—held by general creditors

Bonds: secured by mortgage or security int in specific assets—held by secured creditors

Notes: short-term debt securities may be secured or unsecured—held by institutional lenders

Front 30

Equity securities

Back 30

a. Represent capital of the corp that is at risk in the business
b. Holders of equity securities have no right to repayment of the amt invested or to return on investment
c. Upon liquidation, once creditors are satisfied, all remaining corp assets belong to the shs (i.e.: right to residual)

Front 31

Equity securities holders (shs) usually have:

Back 31

1) Dividend rights—right to a dividend if they are declared at the boards discretion
2) Liquidation rights—right to share corp assets at the end of corp’s existence and
3) Voting rights—right to a voice in mgmt of the corp

Front 32

Common stock

Back 32

Shares that have no preference over any other shares with respect to distribution of assets on liquidation or with respect to pmt of dividends

Front 33

Common stock: liquidation

Back 33

Upon liquidation, holders of common stock divide all the assets remaining after satisfaction of creditors and pmt to preferred stock holders of their liquidation preference

Front 34

Common stock: holders' right to dividends

Back 34

Holder have no right to a dividend unless declared by the directors after pmt of preferred stock dividends

Front 35

Preferred stock

Back 35

a. Preferred shares are shares other than common shares
b. Preferred shareholders are generally entitled to recv fixed dividends before any dividends are paid to common shs

Front 36

Cumulative vs. Noncumulative Dividends

Back 36

Cumulative: shs have right to recv the stated amt each year whether or not earnings are sufficient to pay it

Noncumulative: shs entitled to a dividend only if and when declared by the board