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62 Cards in this Set
- Front
- Back
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What does an incorporator do for a corporation and who can be an incorporator?
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execute and file the corporation's charter and the resident agent's agreement to serve
Only PEOPLE can be incorporators... so that means corporations cannot be incorporators for other corporations |
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What is a charter?
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A charter is the articles of incorporation
A charter acts as a contract between the corporation and the shareholders A charter acts as a contract between the corporation and the state The incorperator must file the charter with the SDAT |
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What information must be included in a charter?
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Corporate name (use magic words)
Names and addresses of incorporators Number of directors and names and addresses of initial directors Name of resident agent and address of principal office Statement of duration (if not perpetual) Statement of Purpose- general statements of purpose are cool, but if the statement is specific, watch out for ultra vires acts Capital Structure (info about stocks) |
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What happens after the charter is filed?
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The Board holds an organizational meeting to select officers and adopt any bylaws
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If the charter doesn't get filed, can the corporation still bind and be bound?
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YES
De Facto Corporation: if the parties make a good faith colorable attempt to comply with the filing requirements but something happens (like the filing gets lost in the mail), then they will be treated like a de jure corporation! Corporation by Estoppel:If you deal with a business that you believe to be a corporation and you treat them as such... they will be considered a corporation and you can't back out of your contract |
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Are bylaws required as part of the corporate form?
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NO- they are internal documents that do not get filed with the state... but if they conflict with the charter, the charter controls (because it is a contract with the state)
Bylaws may change the number of directors though |
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What is a promoter?
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A promoter is a person acting on behalf of a corporation not yet formed.
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What is the legal effect of a pre-incorporation contract?
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Corporations are not liable to pre-incorporation contracts until they adopt them (either express or implied- by accepting benefits)
The promoter IS liable on the contracts... even after the corporation adopts it- NOVATION is required to kill the liability |
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What is an issuance?
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An issuance is when a CORPORATION sells or trades its own stock.
It is a way to raise capital for the corporation |
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What does a Corporation need to receive in exchange for the issuance of stock?
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Generally, consideration.
Consideration may be in the form of money, property, services rendered, future obligations or future services, etc... A corporation can GIVE AWAY stock without consideration as a gift or contribution to a charitable orgainzation |
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How much is a stock worth?
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Par- if a stock is $3 par stock, it cannot be sold for less than $3
No par- if the stock is no par, the Board of Directors sets the price If stock is issued under par, it is treated like "watered stock" and the directors who knowingly authorized the issuance would be liable for the lost money. The person who bought the stock would also be liable because you are charged with knowledge of par stock- but a Third Party is not liable if they bought the stock in good faith. |
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What are preemptive rights?
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If the CHARTER provides for preemptive rights, a stockholder can purchase additional stock whenever there is a new issuance of stock- this maintains their percentage of ownership
ONLY ALLOWED IF THE ISSUANCE IS FOR MONEY- if it is given as a gift or for property of something--- not preemptive right |
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Do preemptive rights exist if they are not contained in the charter?
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NO
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How are directors elected?
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the entire board is elected every year at the annual meeting unless the charter or bylaws set up a "staggered" system.
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Can directors be removed before their terms expire?
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YES- by a majority vote of ALL SHAREHOLDERS ENTITLED TO VOTE
Directors can be removed with or without cause |
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If a director is removed or otherwise leaves before his term is up, who decides who fills the vacancy?
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A majority of the remaining directors
If the director is removed by the shareholders, they can also select the replacement |
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How can the board take a valid action on behalf of the corporation?
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A meeting that satisfies the quorum and voting requirements
Unanimous written consent by all the directors to act without a meeting |
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What happens if an action is taken without a meeting or unanimous written consent?
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it is VOID unless it is ratified by a valid act
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How do quorums and voting relate to each other?
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In order to have a valid meeting, a quorum is needed... a quorum is reached when a majority of directors are present...
Once a quorum exists, only a MAJORITY OF THE DIRECTORS PRESENT need to vote in favor of an action for it to be valid |
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Can the Board of Directors delegate its managerial functions?
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YES- to a committee of one or more directors
But a committee cannot amend bylaws, declare dividends, issue stock, or recommend a fundamental corporate change to stockholders |
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Do all corporations need to have a board of directors?
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No- Close Corporations do not need a board
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Whenever a director does something wrong, what do you start with?
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By statute in Maryland, a director must act in good faith, with the reasonable belief that her act is in the best interest of the corporation, and with the care that an ordinarily prudent person would use under similar circumstances. There is a presumption that director action complies with this standard
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How does a director breach the duty of care?
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Nonfeasance: the director does nothing and that lack of action causes the corporation to lose money (RARE)
Misfeasance: the director does something to harm the corporation... courts won't second guess a management decision so long as it was made in good faith, was informed, and had a rational basis |
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How does a director breach the duty of loyalty?
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Conflicts of Interest
Interested Director Transactions: these will be set aside UNLESS the director shows that the deal was fair and reasonable to the corporation when entered OR the transaction was made known and it was approved by either a majority of all disinterested directors OR a majority of disinterested shares actually voting Competing Ventures- a constructive trust will be placed over any profits Usurpation of Corporate Opportunity- even if it can't really afford it |
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How can a director escape liability when another director does something bad?
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The director must dissent orally and be sure it's recorded in the corporate records (either in the minutes or in writing to the corporate secretary at the meeting or a registered letter to the corporation within 24 hours after adjournment
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How can a director shield himself from liability?
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Good faith reliance on officers or employees reasonably believed competent OR
the opinion of a professional reasonably believed to be actingwithin her professional competence OR a committee of which the director relying was not a member OR financial statements and other financial data |
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What officer positions are required for a corporation?
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President, Secretary, and Treasurer
the bylaws may allow one person to hold multiple offices (except for President and Vice President) |
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When is a corporation REQUIRED to indemnify a director or officer?
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when the person is successful in defending the suit ON THE MERITS OR OTHERWISE
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When is a corporation PROHIBITED from indemnifying a director or officer?
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when the director or officer is adjudged liable for receiving an improper personal benefit or is adjudged liable to the corporation in a suit by or on behalf of the corporation
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When does a corporation have discretion in indemnifying a director or officer?
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indemnity is permitted so long as the director or officer did not act in bad faith or with deliberate dishonesty
Disinterested directors determine eligibility |
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When can shareholders manage the corporation instead of the board of directors?
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When the corporation is a close corporation
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What makes a corporation a close corporation?
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The charted says so
Stock certificates note that it is a CC and cannot be transferred without unanimous SH consent * CC have few SHs and stock is not publicly traded |
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What corporations can you pierce the corporate veil with?
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ONLY close corporations
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How can you pierce the corporate veil?
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Alter Ego- mixing funds
Undercapitalization- usually not enough on its own to pierce * courts generally don't pierce for contract claims... only tort claims |
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What gives a shareholder standing to bring a derivative suit against the corporation?
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Stock ownership- the Plaintiff must have owned stock at the time the claim arose or have gotten it by operation of law (inheritance and divorce) from someone who did own stock when the claim arose...
you must own the stock throughout the litigation! |
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What must a shareholder do in order to bring a derivative suit?
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Make a written demand to the directors to bring suit UNLESS futile (delay would cause irreparable harm to the corporation OR a majority of directors have a personal conflict)
The corporation must be joined as a defendant Dismissal or settlement must be given with court approval so that it may give notice to those who would be affected and get their input on whether it should be dismissed or settled |
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Which shareholders are entitled to vote?
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record shareholders- whomever is shown as the owner of the stock in the corporate records as of the cut-off period
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How can a shareholder designate a proxy to vote for him?
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Send a signed writing to the secretary of the corporation authorizing another person to vote in your place
you can always revoke authorization |
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How long are proxies good for?
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11 months
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Can shareholders enter into voting trusts and voting pools?
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YES
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How can shareholders vote?
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At a meeting that satisfies quorum and voting requirements
by unanimous written consent of the holders of all voting shares |
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What meetings can shareholders vote at?
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Annual meeting- REQUIRED... this is where SHs elect the directors
Special meeting |
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Who can call a special meeting?
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The Board
The President Anyone specified in the bylaws 25% of the shares who file a written request with the corporate secretary- if this request is denied, a writ of mandamus can be sought to compel one |
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Do all shareholders have to be notified of meetings?
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YES- written notice must be given to all shareholders entitled to vote- 10 to 90 days prior to the meeting
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How do shareholders create a quorum?
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A majority of outstanding shares (not shareholders)
Once a quorum is met, a majority of votes actually cast will carry the day! |
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What is cumulative voting and when is it available?
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Cumulative voting allows a shareholder to multiply his number of shares by the number of directors that need to be elected- they can vote ALL OF THESE SHARES for one person
ONLY AVAILABLE FOR ELECTION OF DIRECTORS ONLY AVAILABLE IF IT IS IN THE CHARTER |
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Can a corporation place restrictions on stock transferability?
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YES- so long as they are reasonable under the circumstances and do not place an undue restraint on alienation
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Can the corporation require a stockholder to offer his stock to the corporation before he sells it to a third party?
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YES- this is a valid restriction on stock transferability... it is called a right of first refusal
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Can any shareholder demand access to corporation books and records?
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Sort of- any SH may demand access DURING REGULAR BUSINESS HOURS to bylaws, shareholder minutes, annual reports and voting trust agreements
Additionally, any SH may make a WRITTEN DEMAND for a statement of shares issued and consideration received within 12 months FIVE PERCENT SHs (who have been so for at least 6 months) can make a WRITTEN DEMAND for books of account, stock ledger, statement of assets and liabilities or a list of SHs |
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What are the different types dividends are there?
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Common Stock- everyone shares equally
Preferred Stock- the SHs with preferred stock get their fixed amount first and then the common shares split the rest Preferred and Participating- SHs get their preferred stock first at its fixed price and then they also share the rest equally with the common stock Cumulative- dividends accrue year-to-year |
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How does issuance consideration get split up?
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Between Stated Capital and Capital Surplus
if it is not one, it is the other |
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What goes in to Stated Capital
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The par value of the stock... so if a corporation issues 10,000 shares of $2 par stock for $50,000- $20,000 would be put into the stated capital account and $30,000 would be put into the capital surplus account
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What goes in to the stated capital account if there is no par stock?
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The board allocates how much of the consideration for an issuance will go into the stated capital account and how much will go into the capital surplus account
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How do you get fundamental corporate changes approved?
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Board of Director Action
AND Approval by two-thirds of shares ENTITLED TO VOTE |
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What happens if a shareholder dissents to a fundamental change and it is passed any way?
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The SH has a right of appraisal- this is the right to force the corporation to buy your stock at a fair value
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How should a shareholder make it known that they do not approve of a proposed fundamental change?
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BEFORE THE VOTE- file with the corporation written notice of objection and intent to demand payment (right of appraisal)
DURING THE VOTE- abstain from voting AFTER THE VOTE- within 20 days after the corporation files with the SDAT, make a written demand to be bought out |
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Do shareholders ALWAYS have a right to appraisal?
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NO- if the stock is listed on a national exchange, the SH does not have a right to appraisal
This makes sense because an unhappy SH can just sell his stock on the public market |
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What is the procedure for amending the charter?
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Board of Director Action
AND Notice to shareholders AND Approval by two-thirds of shares ENTITLED TO VOTE AND file amended articles with SDAT |
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What is the procedure for approving mergers or consolidations?
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Board of Director Action
AND Notice to shareholders AND Approval by two-thirds of shares ENTITLED TO VOTE AND file articles of merger with SDAT no SH approval needed where a 90 percent or more subsidiary is merged into a parent corporation |
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When ABC merges with XYZ, does ABC take on all rights and liabilities of XYZ?
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YES- this is called successor liability
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What is the procedure for approving transfer of all or substantially all of the assets of a corporation?
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Board of Director Action
AND Notice to shareholders AND Approval by two-thirds of shares ENTITLED TO VOTE this is only needed for the corporation that is SELLING... not buying |
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What is the procedure for dissolving a corporation?
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Voluntary: board resolution and approval by two-thirds of the shares entitled to vote
Involuntary (Court Order): shareholder petitions court because of: (1) illegal or fraudulent act by directors; (2) insolvency; or (3) shareholder failure for at least two annual meetings to fill a vacant board position 25% of the shares can petition because of director deadlock preventing action by the board or shareholder deadlock preventing election of directors Creditors can petition if the corporation is insolvent |
