Corporations

Front 1

CORPORATIONS
(The SIX Test Issues)

Back 1

1. Corporate formation
2. Issuance of stock
3. Action by and liability of directors and officers
4. Rights of shareholders
5. Fundamental corporate changes
6. Federal security laws

Front 2

Corporation becomes liable on a promoter's reincorporation contract when the corporation __________ the contract by:

Back 2

adopts; express board of directors resolution; implied adoption through knowledge of the contract and acceptance of its benefits (like ratification)

Front 3

Promotion remains liable on __________ until there has been a ___________, which means _________.

Back 3

preincorporation contracts.. Novation… agreement between promoter, corporation and other contracting party that that the corporation will replace the promoter under the contract.

Front 4

If promoter enters a contract and the corporation is never formed…

Back 4

promoter alone is liable on the contract.

Front 5

If promoter enters a contract and the corporation merely adopts the contract...

Back 5

both the corporation and the promoter are liable (3d party can choose to sue either)

Front 6

Promoters are _________ of each other and the corporation and so cannot _____________ on their dealings with the corporation; they have a _________

Back 6

fiduciary… make a secret profit … duty of loyalty

Front 7

A promoter who sells property to corporation that he acquired before becoming a promoter…

Back 7

any profit is recoverable by corporation only if the property was sold for more than FMV

Front 8

sale to Corporation of property acquired by promoter AFTER becoming a promoter:

Back 8

ANY PROFIT recoverable by the Corporation.

Front 9

SUBSCRIBERS

Back 9

Persons or entities who make written offers to buy stock from a Corporation not yet formed.

Front 10

January, 2011...Sam signs a preincorporation subscription agreement, offering to buy 100 shares of stock, a Corporation not yet formed. One week later, Sam changes her mind, can Sam revoke?

Back 10

YES -- revocable until acceptance by a Corporation. In the other states irrevocable for six months.

Front 11

CORPORATION
(confirmation Requirements -- de jure corporate status)

Back 11

Articles of Incorporation

Front 12

INCORPORATORS

Back 12

Signs & Files the Articles of Incorporation with the Secretary of State.

Front 13

Articles of Incorporation (AOI)
"is A PAIN"

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Authorized Shares
Purpose
Agent
Incorporator
Name

Front 14

"Authorized Shares"

Back 14

the maximum #of shares the Corporation is authorized to issue.

Front 15

"Purpose"

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1. GENERAL purpose & PERPETUAL duration -- PRESUMED
2. SPECIFIC STATEMENT of PURPOSE and ultra vires rules. "Beyond the powers" -- the state can enjoin the ultra vires activity

Front 16

"Agent"

Back 16

Name and Address of required office. (Registered agent is the Corporation's official legal representative.)

Front 17

"Name"

Back 17

The name must contain some indicia of corporate status.

Front 18

DE FACTO CORPORATION DOCTRINE

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a business failing to achieve "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.

Front 19

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)

Front 20

What's the requirement for bylaws?

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They need not exist; they need not be in articles of incorporation

Front 21

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)

Front 22

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

Front 23

"Alter ego"

Back 23

Corporation has failed to observe sufficient corporate formalities.

Front 24

"Undercapitalization"

Back 24

Corporation has failed to maintain sufficient funds to cover foreseeable liabilities.

Front 25

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 ____________.

Back 25

equity; tort victims … contract claimant… controlling shareholders… passive investors

Front 26

A foreign corporation is incorporated outside __________.

Back 26

the forum state.

Front 27

A foreign corporation that wants to do business in California must file a _________ that includes _____________.

Back 27

statement of authority with the Secretary of State... all information required in the articles. (A PAIN)

Front 28

Issuance occurs…

Back 28

only when a corporation is about to sell its OWN shares of stock - not when 3d parties buy/sell shares from each other

Front 29

A corporation issuing its own shares must receive ___________ in _________; this means ___________.

Back 29

par value… consideration… minimum issuance price

Front 30

"No par" means ________. Is it valid in MO?

Back 30

no minimum issuance price; it is valid.

Front 31

Treasury stock is _________.

Back 31

stock previously issued, now repurchased, by the corporation; it may be resold by corporation.

Front 32

Treasury stock can be sold for ____________, because it is ________ stock.

Back 32

any valid consideration deemed adequate by the board … no par stock.

Front 33

Can stock be issued to acquire property?

Back 33

Yes - any valid consideration may be received, if the board values it to be worth at least par value.

Front 34

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.

Front 35

PREEMPTIVE RIGHTS

Back 35

right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash.

Front 36

What if a question - or the articles of incorporation - are unclear regarding whether there are preemptive rights?

Back 36

Preemptive rights do not exist unless expressly granted in the articles. in Missouri, preemptive rights are presumed.

Front 37

DIRECTORS & OFFICERS

Back 37

corporations must have a board with at least 1 member. But if less than 3 members, the number must be in the articles of incorporation.

Front 38

_________ elect directors.

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SHAREHOLDERS

Front 39

Shareholders can REMOVE a director before her term expires. On what basis?

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With or Without Cause.

Front 40

Unless all directors ______________, a _________ is required for all board activity.

Back 40

consent in writing to act without a meeting… a meeting

Front 41

_______ of directors' meetings can be set in bylaws.

Back 41

Notice

Front 42

Board members must vote __________; __________ or ____________ are not allowed, but ___________ are now generally valid

Back 42

in person and one at a time… proxies … voting agreements. Conference calls

Front 43

QUORUM

Back 43

must have a majority of ALL directors to take action (unless a different percentage is required in bylaws).

Front 44

Voting Agreements are generally...?

Back 44

Not Allowed

Front 45

To pass a resolution, all that is required is a ______vote of those ______.

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Majority... Present

Front 46

Voting Hypothetical
"if there are 9 directors, at least_____directors must attend the meeting to constitute a quorum. If 5 directors attend, at least_____must vote for a resolution in order for it to pass.

Back 46

5... 3

Front 47

each director is presumed to have concurred in Board action unless her dissent or abstention is recorded_____.

Back 47

"In writing" (in the minutes or letter to corporate secretary)

Front 48

Directors have a duty to __________ the corporation but may ________ to a committee of one or more directors that __________.

Back 48

manage… delegate management functions… recommends action to the board

Front 49

in managing the Corporation, the directors are protected from liability by the________. This is a presumption that the directors manage the Corporation in good faith best interests of the corporation and its shareholders. As such, directors will not be liable for innocent mistakes of business judgment.

Back 49

Business Judgment Rule

Front 50

Directors, however, are_______, who owe the Corporation_______and_______.

Back 50

Fiduciaries.... duties of care...... loyalty.

Front 51

Duty of Loyalty

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1. Self-dealing (receives an unfair benefit to herself or a relative, or another one of her businesses in a transaction with your own Corporation.
2. Usurping corporate opportunities (by herself for opportunity which the Corporation would have had pursued.)
3. Ratification (defenders may defend a claim by obtaining INDEPENDENT ratification through 1) a majority vote of independent directors; 2) majority vote of a committee of at least 2 INDEPENDENT directors or 3) majority vote of shares held by INDEPENDENT shareholders.

Front 52

OFFICERS

Back 52

1. Same and they removed them at will, but the Corporation will be liable for breach of contract damages.duties of care and loyalty as directors
2. Are AGENTS of the Corporation and bind the Corporation by their authorized activities
3. Corporations must have a President, Secretary and Treasurer.
4. Directors have virtually unlimited power to elect

Front 53

INDEMNIFICATION of DIRECTORS & OFFICERS

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1. The Corporation may NEVER indemnify a director who: has lost a lawsuit to their own Corporation
2. The Corporation MUST ALWAYS indemnify if: they win their lawsuit against any party.

Director or Officer has incurred costs, attorney's fees, fines, a judgment or settlement in the course of corporate business; she seeks reimbursement from the Corporation.

Front 54

THE CORPORATION MAY INDEMNIFY IF: --

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1. Liability to a third party of SETTLEMENT with the Corporation.
2. Director or officer shows that she acted in good faith and that she believed her conduct was in corporate best interest
3. Who may determine whether to grant permissive indemnity? (Four kinds -- see next card)

Front 55

FOUR KINDS OF INDEMNIFICATION
(Permissive)

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1.a majority of independent directors who approved it
2. A committee of at least 2 independent directors
3. Majority of shares held by independent shareholders
4. A special lawyers opinion regarding it.

Front 56

Shareholder ___________ suits

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derivative … a shareholder is suing to maintain a corporation's cause of action

Front 57

How to tell if a lawsuit it is a derivative suit?

Back 57

Ask: Could the corporation have standing to bring this suit

Front 58

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)

Front 59

Who has the right to vote at an upcoming meeting where voting occurs?

Back 59

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.

Front 60

Since only record date shareholders vote, it's irrelevant who owns shares on _____________

Back 60

the meeting date

Front 61

Can a shareholder of record on the record date vote at the meeting if he's sold shares between record and meeting dates?

Back 61

Yes

Front 62

What are the ingredients for a valid proxy?

Back 62

Writing (fax/e-mail OK), signed by record owner, directed to secretary of corporation, authorizing another to vote the shares, valid for 11 months

Front 63

Can shareholder revoke/change proxy after issuing?

Back 63

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)

Front 64

Can S revoke a proxy that says it is irrevocable?

Back 64

Yes - merely labeling a proxy irrevocable is not enough to make it so; it must be coupled with an interest

Front 65

What kinds of meetings are there?

Back 65

annual meeting and special meeting

Front 66

Every corporation must have at least one ________ meeting, during which ___________; notice requires ______.

Back 66

annual meeting… at least one director slot is open for election; … time and place for the meeting

Front 67

A special meeting can be called by ______________; such a meeting can consider ______. Notice must _____________.

Back 67

board, president, or holders of at least 10 of voting shares. … special proposals or fundamental corporation changes … describe the special purpose for the meeting

Front 68

What can happen at a special meeting?

Back 68

Only the information included in the special notice.

Front 69

Quorum for valid shareholders meeting

Back 69

majority of all shares must be represented - in person or by proxy - when the meeting starts

Front 70

How is vote counted at a shareholders meeting?

Back 70

Majority of votes cast (abstentions are not counted)

Front 71

How can shareholders X and Y engage in pool or block voting?

Back 71

Voting trust or voting agreement.

Front 72

Voting trust is a

Back 72

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

Front 73

Shareholder voting agreement is

Back 73

an agreement to vote in writing as required by the agreement itself.

Front 74

Straight voting - Shareholder owns 1000 shares, 9 director open slots. Shareholder can cast

Back 74

1000 shares for each slot - this system puts minority shareholders at a disadvantage

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Cumulative voting - Shareholder holds 1000 shares, 9 directors/ 1 or more 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

Front 76

Presumption re cumulative voting

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does not exist unless expressly granted in articles. (Compare Missouri -- cumulative voting presumed)

Front 77

Shareholders have the right to examine ______________ upon _______________.

Back 77

books and records of the corporation… notice and at proper times.

Front 78

Shareholders have _________ right to receive dividends. Directors have ______________ to declare dividends, but may never do so _________________.

Back 78

no right… discretion … if the corporation is insolvent or would be rendered insolvent by the dividend

Front 79

If board members approve an unlawful dividend, board members are __________, but have _____________.

Back 79

liable personally… a defense of good faith reliance on financial officer's representations regarding solvency.

Front 80

Priority of distributions

Back 80

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

Front 81

Corp. declares $400K in dividends. Shareholders include 100K shares of common stock and 20K shares of preferred with $2 dividend preference. What result?

Back 81

Preferred dividend of $40K ($2/share); common shareholders share $360K equally ($3.60/share)

Front 82

Corp. declares $400K in dividends. Shareholders include 100K shares of common stock and 20K shares of $2 preferred that are participating. What result?

Back 82

Preferred dividend of $40K ($2/share); preferred and common shareholders share $360K equally ($3/share)

Front 83

After 4 years, Corp. declares $400K in dividends. Shareholders include 100K shares of common stock and 20K shares of $2 preferred that are cumulative. What result?

Back 83

Preferred dividends of $160K ($2/share * 4 years); common shareholders share $240K equally ($2.40/share).

Front 84

Shareholder agreements to eliminate corporate formalities are valid if _____________.

Back 84

Unanimous shareholder election in writing, plus some reasonable share transfer restriction.

Front 85

What is the effect of a valid shareholder agreement to eliminate corporate formalities?

Back 85

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

Front 86

What is a PC?

Back 86

licensed professionals (i.e., lawyers, accountants, medical professions) may incorporate as a Professional Corporation

Front 87

shareholder agreement to eliminate corporate formalities (closely held corporations)

Back 87

can eliminate corporate formalities & not having failed pierced by 1) receiving 2/3 of shareholders vote + 2) 50 or fewer shareholders +3) reasonable share transfer restriction.

Advantage: 1. No veil pierced 2. No double taxing "S" Corp. = treated as if a partnership for taxing purposes. Must have 100 or fewer shareholders who are individual United States residents, and one class of stock.

Front 88

Requirements for a Professional Corporation

Back 88

1. Organizers file the Articles with name designated "Professional Corporation" or "PC".
2. The shareholders and directors must be licensed professionals.
3. The Corporation may practice only one designated profession.
4. The 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.

Front 89

What is a shareholder's liability for a corporation's obligations?

Back 89

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

Front 90

Recognized Fundamental Corporate Changes

Back 90

1. MERGER (A becomes B)
2. CONSOLIDATION (A & B become C)
3. DISSOLUTION (A dissolves).

FUNDAMENTAL (not ministerial) Amendment of the Articles; SALE (not purchased) of SUBSTANTIALLY All of the Corporations Assets.

Front 91

Process to effectuate any fundamental change:

Back 91

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)

Front 92

Process to effectuate any fundamental change:

Back 92

See Missouri Distinctions (2/3rds of the shares entitled to vote, and by 2/3rds of shares of each voting group that is affected.

Front 93

"Short Form" Merger

Back 93

no shareholder approval is required for a "short form" merger wary parent corporation that owns 90% or more of the stock and its subsidiary merges with the subsidiary.

Front 94

Possibility of dissenting shareholder right of appraisal

Back 94

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

Front 95

What happens if dissenting shareholder and corporation cannot agree on fair value of the shares?

Back 95

Corporation has power to appoint an expert appraiser to value the shares and the appraisal will be binding on the parties

Front 96

Section 10(b) is

Back 96

the anti-fraud provision of the Securities Exchange Act of 1934

Front 97

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

Front 98

Extra requirements of 10(b) action for private investors:

Back 98

For Damages, investors must also prove:
1. RELIANCE -- investors actually relied on fraud, or invested at a market price infected by fraud.
2. Loss Causation -- the fraud not only induce investors to purchase or sell, but also caused their economic losses.

Front 99

Section 16(b) is

Back 99

the short-swing trading profits section of the Securities Exchange Act of 1934

Front 100

When does 16(b) apply?

Back 100

1. Big corporations - Reporting corporation (listed on a national exchange, or at least 500 shareholders and $10M assets), 2. 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.

Front 101

What happens when 16 (b) applies?

Back 101

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.

Front 102

Sarabanes-Oxley Act of 2002 - requires that ____________ must ______ that based on ______ reports filed with the SEC __________and _________.

Back 102

CEO and CFO … certify … knowledge … do not contain material misrepresentations/ommissions … fairly presented the financial position of the company

Front 103

In Sarbanes-Oxley actions, a corporation wants to prove…

Back 103

no knowingly false filings + no benefits during falsehoods or blackout periods.
WILLINGLY CERTIFYING a false report could bring a $5 million fine and 20 years, if false reports have to be corrected and restated, the Corporation (directly or derivatively) may recover Officers benefits made from trading the company securities within 12 months after the false reports were filed, and may recover incentive-based compensation received during that period.