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108 Cards in this Set
- Front
- Back
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Issue areas:
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Corporate formation, issuance of stock, action by and liability of directors and officers, rights of shareholders, fundamental corporate changes, federal securities laws
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promoter
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person/thing acting on behalf of a corporation not yet formed
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Corporation becomes liable on a promoter's reincorporation contract when the corporation __________ the contract by:
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adopts; express board of directors resolution; implied adoption through knowledge of the contract and acceptance of its benefits (like ratification)
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Promotion remains liable on __________ until there has been a ___________, which means _________.
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preincorporation contracts.. Novation… agreement between promoter, corporation and other contracting party that that the corporation will replace the promoter under the contract
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If promoter enters a contract and the corporation is never formed…
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promoter alone is liable on the contract
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If promoter enters a contract and the corporation merely adopts the contract…
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both the corporation and the promoter are liable (3d party can choose to sue either)
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Promoters are _________ of each other and the corporation and so cannot _____________ on their dealings with the corporation; they have a _________
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fiduciary… make a secret profit … duty of loyalty
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A promoter who sells property to corporation that he acquired before becoming a promoter…
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any profit is recoverable by corporation only if the property was sold for more than FMV
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If a promoter sells property to corporation that he acquired after becoming a promoter…
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any profit is recoverable by the corporation
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Subscriber
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a person or entity who makes a written offer to buy stock from a corporation not yet formed
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Can a subscriber revoke a preincorporation offer to buy stock in a corporation not yet formed?
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No - such an offer is irrevocable for six months
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Incorporator
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signs and files articles of incorporation with the state
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Articles of incorporation must contain:
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APAIN: Maximum number of shares corporation is AUTHORIZED to issue; PURPOSE clause (general/perpetual presumed0; AGENT'S name/address; INCORPORATOR'S name/address; CORPORATION'S name (must include an indicia of corporate status)
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Purpose clauses: _________ are valid/presumed in the absence of a ________.
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general purpose and perpetual duration… specific purpose or limited duration
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Ultra vires activity means…
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an activity beyond the purpose clause listed in the articles of incorporation
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Consequences of engaging in ultra vires activities:
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State can enjoin ultra vires activities; corporation can sue its own directors and officers personally for losses caused by the ultra vires activities (they've exceeded the scope of their authority as agents of the corporation)
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What's the requirement about a corporation's name?
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It must contain some indicia of corporate status
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What's the requirement for bylaws?
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They need not exist; they need not be in articles of incorporation
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Corporation is _________ if it's properly filed articles of incorporation; otherwise it is ________, meaning ___________.
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De jure; de facto - organizers made a good faith, colorable attempt to comply with corporation formalities and have no knowledge of the lack of corporate status
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Legal significance of formation of corporation?
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Corporation is a separate legal person; shareholders are not personally liable for the debts of the corporations (principle of limited liability)
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Piercing the corporate veil:
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General rule: Shareholder is not liable for the debts of the corporation, but courts will pierce the corporate veil to avoid fraud or unfairness when: corporation has failed to observe sufficient corporate formalities (alter-ego); corporation has failed to maintain sufficient capital to funds foreseeable liabilities, (undercapitalization) or both
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Veil piercing is a doctrine in ____________; in a close case, courts are more willing to pierce the corporate veil for a _______ than for a ____________; they're more likely to pierce against ________ rather than ____________.
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equity; tort victims … contract claimant… controlling shareholders… passive investors
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A foreign corporation is incorporated outside __________.
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the forum state.
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A foreign corporation that wants to do business in California must file a _________ that includes _____________.
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certificate of authority… all information that is required in the articles.
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Issuance occurs…
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only when a corporation is about to sell its OWN shares of stock - not when 3d parties buy/sell shares from each other
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A corporation issuing its own shares must receive ___________ in _________; this means ___________.
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par value… consideration… minimum issuance price
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"No par" means ________. Is it valid in CA?
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no minimum issuance price; it is valid.
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Treasury stock is _________.
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stock previously issued, now repurchased, by the corporation; it may be resold by corporation.
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Treasury stock can be sold for ____________, because it is ________ stock.
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any valid consideration deemed adequate by the board … no par stock.
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Can stock be issued to acquire property?
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Yes - any valid consideration may be received, if the board values it to be worth at least par value.
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What if corporation issues par stock for less than par value?
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Corporation can elect to recover difference from either its own directors (because they're liable personally for authorizing below-par issuance) or from purchasing shareholder, who is liable (only) to pay full consideration (= par value) for the shares.
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Preemptive right
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right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash.
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What if a question - or the articles of incorporation - are unclear regarding whether there are preemptive rights?
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Preemptive rights do not exist unless expressly granted in the articles.
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Corporations must have a board with at least _________ member.
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One
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_________ elect directors.
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Shareholders
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Shareholders can remove a director before her term expires - how?
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with or without cause.
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Unless directors ______________, a _________ is required for all board activity.
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consent in writing to act without a meeting… a meeting
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_______ of directors' meetings can be set in bylaws.
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Notice
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Board members must vote __________; __________ or ____________ are not allowed, but ___________ are now generally valid
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in person and one at a time… proxies … voting agreements. Conference calls
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Board must have _____________, or ___________ to take action; _______________ must vote in favor to pass a resolution.
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a quorum, or a majority of all directors; a majority of those who are present
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Each director is presumed to ___________, unless her ________ or _________ is recorded __________.
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have concurred in board action... dissent … abstention… in writing.
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Directors have a duty to __________ the corporation but may ________ to a committee of one or more directors that __________.
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manage… delegate management functions… recommends action to the board
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In managing the corporation, the directors are protected from liability by the ______________, which is _______________.
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business judgment rule… presumption that directors manage the corporation in good faith and in the best interests of the corporation and their shareholders.
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Under the _______, directors will not be liable for _____________.
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business judgment rule... innocent mistakes of business judgment
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Directors are fiduciaries who owe the corporation duties of _______ and _________.
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care… loyalty.
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The duty of care requires that directors _________________.
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act with the care that a prudent person would use with regard to her own business, unless the Articles have limited director liability for a breach of the duty of care.
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The duty of loyalty require that directors __________.
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may not receive an unfair benefit to the detriment of the corporation or its shareholders unless there has been material disclosure and independent ratification.
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Unfair benefit may appear in the context of __________ or _________.
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self-dealing… usurping corporate opportunities.
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Self-dealing means
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a director receives an unfair benefit to herself (or her relative, or another one of her businesses) in a transaction with her own corporation.
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Usurping corporate opportunities means
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director receives an unfair benefit by usurping for herself an opportunity which the corporation would have pursued
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Ratification allows Ds to defend a claim by obtaining approval of ________
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a majority vote of independent directors, a majority vote of a committee of at least 2 independent directors, or a majority vote of shares held by independent shareholders.
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Officers owe duties of __________ and _________ to corporation.
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loyalty … care
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Offices are _______- of the corporation and bind the corporation by their __________.
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agents … authorized activities
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Corporations must have these officers:
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President, secretary, treasurer
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Directors have _________ to select officers and may remove them from office ___________ - but corporation will be liable for ___________.
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virtually unlimited power… at any time… breach of contract damages.
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A corporation may never indemnify a director or officer who
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has lost a lawsuit to their own corporation.
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The corporation must always indemnify a director or officer who
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wins a lawsuit against any party (against the corporation or another party)
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The corporation may indemnify a director or officer if
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liability to third-parties/settlement with the corporation; D/O shows that she acted in good faith and believed that her conduct was in the corporation's best interest
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____________ may determine whether to grant permissive indemnity?
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A majority of independent directors; a committee of at least two independent directors; vote by a majority of shares held by independent shareholders; a special lawyer's opinion could recommend it
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Shareholders' rights:
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sue, sell, xxx
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Shareholder ___________ suits
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derivative … a shareholder is suing to maintain a corporation's cause of action
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How to tell if a lawsuit it is a derivative suit?
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Ask: Could the corporation have standing to bring this suit
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What are the requirements for bringing a shareholder derivative suit?
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Contemporaneous stock ownership; must generally make demand on directors that they cause their own corporation to bring suit (before suit can be filed, demand must be made and rejected, or at least 90 days must have passed since demand was made)
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Who has the right to vote at an upcoming meeting where voting occurs?
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A shareholder of record - based on record date, the voter eligibility cut-off date set by board - any day w/I 70 day period leading up to the meeting.
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Since only record date shareholders vote, it's irrelevant who owns shares on _____________
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the meeting date
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Can a shareholder of record on the record date vote at the meeting if he's sold shares between record and meeting dates?
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Yes
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What are the ingredients for a valid proxy?
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Writing (fax/e-mail OK), signed by record owner, directed to secretary of corporation, authorizing another to vote the shares, valid for 11 months
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Can shareholder revoke/change proxy after issuing?
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Yes. Proxies are revocable unless labeled irrevocable AND coupled with an interest (e.g., in the shares themselves) (e.g., S gives B the proxy at the same time S sells share to B)
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Can S revoke a proxy that says it is irrevocable?
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Yes - merely labeling a proxy irrevocable is not enough to make it so; it must be coupled with an interest
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What kinds of meetings are there?
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annual meeting and special meeting
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Every corporation must have at least one ________ meeting, during which ___________; notice requires ______.
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annual meeting… at least one director slot is open for election; … time and place for the meeting
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A special meeting can be called by ______________; such a meeting can consider ______. Notice must _____________.
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board, president, or holders of at least 10 of voting shares. … special proposals or fundamental corporation changes … describe the special purpose for the meeting
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What can happen at a special meeting?
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Only the information included in the special notice.
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Quorum for valid shareholders meeting
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majority of all shares must be represented - in person or by proxy - when the meeting starts
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How is vote counted at a shareholders meeting?
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Majority of votes cast (abstentions are not counted)
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How can shareholders X and Y engage in pool or block voting?
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Voting trust or voting agreement.
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Voting trust is a
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formal delegation of voting power to a voting trustee for 10 years (or different term if states otherwise) - must be in writing, typically filed with corporation, transfers shares to voting trustee; shareholders retain other rights except for voting; shareholders get trust certificates
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Shareholder voting agreement is
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an agreement to vote in writing as required by the agreement itself.
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Straight voting - Shareholder owns 1000 shares, 9 open slots. Shareholder can cast
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1000 shares for each slot - this system puts minority shareholders at a disadvantage
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Cumulative voting - Shareholder holds 1000 shares, 9 open slots. Shareholder can cast
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9000 votes for one slot, or any combination - it's only one election - this empowers minority shareholders
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Presumption re cumulative voting
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does not exist unless expressly granted in articles.
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Shareholders have the right to examine ______________ upon _______________.
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books and records of the corporation… notice and at proper times.
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Shareholders have _________ right to receive dividends. Directors have ______________ to declare dividends, but may never do so _________________.
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no right… discretion … if the corporation is insolvent or would be rendered insolvent by the dividend
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If board members approve an unlawful dividend, board members are __________, but have _____________.
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liable personally… a defense of good faith reliance on financial officer's representations regarding solvency.
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Priority of distributions
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Preferred shares - first (amount of preference); common shares - last and equally; preferred that are participating shares are paid twice; preferred that are cumulative have right to receive unpaid and current years dividends
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Corp. declares $400K in dividends. Shareholders include 100K shares of common stock and 20K shares of preferred with $2 dividend preference. What result?
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Preferred dividend of $40K ($2/share); common shareholders share $360K equally ($3.60/share)
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Corp. declares $400K in dividends. Shareholders include 100K shares of common stock and 20K shares of $2 preferred that are participating. What result?
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Preferred dividend of $40K ($2/share); preferred and common shareholders share $360K equally ($3/share)
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Corp. declares $400K in dividends. Shareholders include 100K shares of common stock and 20K shares of $2 preferred that are cumulative. What result?
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Preferred dividends of $160K ($2/share * 4 years); common shareholders share $240K equally ($2.40/share).
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Shareholder agreements to eliminate corporate formalities are valid if _____________.
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Unanimous shareholder election in writing, plus some reasonable share transfer restriction.
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What is the effect of a valid shareholder agreement to eliminate corporate formalities?
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No piercing even if failed to observe formalities, and possible subchapter S Corp. status, meaning deemed partnership for tax purposes, if < 100 shareholders and only one class of stock
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What is a PC?
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licensed professionals (i.e., lawyers, accountants, medical professions) may incorporate as a Professional Corporation
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Requirements for a PC
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Organizers file articles with name designeated "Professional Corporation" or "PC" ; shareholders must belicensed professionals; corporation must practice only one designated profession; professionals are liable personally for their own malpractice; but, professionals are not liable personally for each other's malpractice or the obligations of the corporation itself
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What is a shareholder's liability for a corporation's obligations?
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None, except for piercing corporate veil and that controlling shareholders owe fiduciary duty to minority shareholders and are liable for selling corporation to party who LOOTS corporation, unless reasonable measures taken to investigate buyer's reputation/plans for the corporation
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Fundamental changes include:
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Merger (a becomes B); Consolidation (A & B becomes C); Dissolution (A dissolves); Fundamental (not ministerial) Amendment of Articles; Sale (not purchase) of substantially all of corporation's access
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Process to effectuate any fundamental change:
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Resolution by board at valid meeting; notice of special meeting; a majority of all shares entitled to vote (not just votes cast) AND a majority of each voting group that is adversely affected by the change (except short-form merger); possibility of dissenting shareholder right of appraisal; file notice with the state (e.g., articles of merger)
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Who can approve a fundamental change - what exception??
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Shareholders must vote - board alone cannot approve… except no shareholder approval required for "short-form" merger, where parent corp. that owns 90% or more of the stock in its subsidiary merges with the subsidiary
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Possibility of dissenting shareholder right of appraisal
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Shareholder who does not vote in favor of a fundamental change has right to force the corporation to buy her shares at fair value (dissenter may abstain…) - before vote, file written notice of objection/intent to demand payment; do not vote in favor of the proposed change; make prompt written demand to be bought out
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What happens if dissenting shareholder and corporation cannot agree on fair value of the shares?
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Corporation has power to appoint an expert appraiser to value the shares and the appraisal will be binding on the parties
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Section 10(b) is
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the anti-fraud provision of the Securities Exchange Act of 1934
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Essential elements of 10(b) action:
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Scienter (intent to deceive); deception (liar - misrepresentation of material fact, or failure to disclose material fact in breach of fiduciary duty to disclose; insider trading - misappropriator - steals/converts material nonublic information and uses it to purchase or sell securities, or tipper - tips inside information for personal benefit to another who trades on it, or tippee - receives inside information and trades on it with knowledge that the info was disclosed in breach of tipper's fiduciary duty); in connection with the actual purchase or sale of securities
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Extra requirements of 10(b) action for private investors:
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Reliance (investors actually relied on fraud or invested at a market price infected by fraud (= fraud of the market); loss causation (fraud not only induced investors to buy or sell but caused their economic losses)
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Section 16(b) is
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the short-swing trading profits section of the Securities Exchange Act of 1934
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When does 16(b) apply?
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Big corporations - Reporting corporation (listed on a national exchange, or at least 500 shareholders and $10M assets), big shot defendant - officer, director or more than 10% SH, buying or selling stock within a single six month period (short-swing trading). FRAUD is not required
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Is fraud required for a 16(b) action?
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No.
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What happens when § 16(b) applies?
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All profits from such short-swing trrading are recoverable by the corporation if, within six months before or after any sale, there was a purchase at a lower price than the sale price, there is a profit.
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Sarabanes-Oxley Act of 2002 - applies to
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reporting corporations
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Sarabanes-Oxley Act of 2002 - requires that ____________ must ______ that based on ______ reports filed with the SEC __________and _________.
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CEO and CFO … certify … knowledge … do not contain material misrepresentations/ommissions … fairly presented the financial position of the company
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In Sarbanes-Oxley actions, a corporation wants to prove…
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no knowingly false filings + no benefits during falsehoods or blackout periods
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