Corporations

Front 1

Promoters

Back 1

persons acting on behalf of corporation not yet formed

Front 2

When does corporation become liable on a promoter’s preincorporation contract?

Back 2

when the corporation adopts the contract by either

1. express Board of Directors resolution; or

2. implied adoption through knowledge of contract and acceptance of benefits

Front 3

Liability for preincorporation contracts

Back 3

promoter remains liable on preincorporation contract until there has been a novation (i.e. a brand new agreement between promoter, corp, and contracting 3p that corp will replace promoter under the contract)

---1. if corp never forms, promoter alone is liable on this contract

---2. if promoter enters preincorporation contract, and corp merely adopts contract, both corp and promoter are liable on contract; 3p has a choice for who to recover against

Front 4

Promoters fiduciary relationship

Back 4

Promoters owe fiduciary relationship to each other and the corporation.

Promoters cannot make a secret profit on dealings with corp

Front 5

Remedy for breach of promoter’s fiduciary responsibility

Back 5

1. For a sale to the corporation of property acquired by promoter before becoming a promoter:
profit recoverable by corp only if sold for more than fair market value

2. For a sale to the corporation of property acquired by promoter after becoming a promoter:
any profit recoverable by corp

Front 6

Subscribers

Back 6

persons or entities who make written offers to buy stock from a corp not yet formed

Front 7

Revocability of a preincorporation offer to buy stock

Back 7

at common law it’s revocable;

but under corporate law, a preincorporation offer to buy stock of a corporation not yet formed is irrevocable for 6 months.

Front 8

Incorporator

Back 8

merely signs & files the articles of incorporation with the state

Front 9

Formation requirements – de jure corporate status

Back 9

Articles must include APAIN:

Authorized shares

Purpose

Agent

Incorporators

Name of corporation.

Front 10

Formation requirements – de jure corporate status: Authorized shares

Back 10

The maximum # of shares the corp is authorized to issue. A corporation may never issue more shares than this number without amending the articles.

Front 11

Formation requirements – de jure corporate status: Purpose

Back 11

A general purpose and perpetual duration are valid and will be presumed now in the absence of a specific purpose or a limit on duration.

Front 12

Formation requirements – de jure corporate status: Purpose: Ultra vires rules

Back 12

1. the State can enjoin ultra vires activities

2. corporation may sue its own directors & officers for losses caused by ultra vires activities

Front 13

Formation requirements – de jure corporate status: Agent

Back 13

Agent is the corporation's official legal representative

Articles must include name and address of registered office

Front 14

Formation requirements – de jure corporate status: Incorporators

Back 14

their names and addresses

Front 15

Formation requirements – de jure corporate status: Name of corporation

Back 15

name must contain some indicia of corporate status (e.g. corp., inc.)

Front 16

Bylaws

Back 16

A corporation need not adopt bylaws. So bylaws not necessary for formation of a corporation (there are only 5 requirements—APAIN).

Board of directors has power to adopt/amend bylaws, unless articles give power to shareholders

Front 17

De Facto Corporation

Back 17

Business failing to achieve de jure corporate status nonetheless treated as a corporation if organizers have made a colorable good faith attempt to comply w/ corporate formalities and have no knowledge of lack of corporate status.

Front 18

Legal significance of forming a corporation

Back 18

1. a corporation is a separate legal person

2. generally, shareholders are not personally liable for debts of corporation (limited liability for stock price only)

Front 19

Piercing the Corporate Veil

Back 19

“Generally, a shareholder is not liable for the debts of a corporation. Except, piercing the corporate veil to hold the shareholder liable is available to avoid fraud or unfairness.”

Front 20

When piercing the corporate veil is appropriate

Back 20

1. alter ego - failure to observe sufficient corporate formalities

2. undercapitalization - failure to maintain sufficient funds to cover foreseeable liabilities;

(Courts are far more willing to pierce the corporation for innocent tort victims than for contract claimants)

Front 21

Foreign Corporations

Back 21

A corporation incorporated outside the state that wishes to engages in regular interstate business in the state must qualify by filing a certificate of authority with Secretary of State that includes all the same information required in articles (APAIN)

Front 22

Issuance of stock: par value

Back 22

minimum issuance price (corporation must never receive less than this price)

Front 23

Issuance of stock: no par

Back 23

means no minimum issuance price; therefore any valid consideration can be received if deemed adequate by the board

Front 24

Treasury stock

Back 24

stock that was previously issued and has been reacquired by the corp. It is deemd to be no par stock—it can be sold for any valid consideration deemed adequate by BoD

Front 25

Acquiring property with par value stock

Back 25

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

Front 26

Consequences of issuing par stock for less than par value

Back 26

-directors are personally liable for authorizing a below par issuance—they have no authority to do this

-shareholders are liable to pay full consideration for their shares (i.e. at least par value)

Front 27

Preemptive rights

Back 27

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

2. preemptive rights do not exist unless they are expressly granted in the articles

Front 28

Statutory requirements for directors

Back 28

1. Corporations must have a board of directors with at least 1 member

2. Shareholders elect directors

3. Shareholders can remove a director before her term expires--with or even without cause

4. Valid meeting required to elect directors

Front 29

Valid meeting requirements

Back 29

a. required for all board action, unless all directors consent in writing to act without a meeting

b. notice of directs meeting can be set in bylaws

c. proxies are not allowed, also no voting agreements. conference calls now generally valid

d. quorum - must have a majority of all directors to take action (unless bylaws say o/w)

e. vote - to pass a resolution, all that is required is a majority vote of those present
if 9 directors, need 5 present(quorum requirement); 3 passes (vote requirement)

f. each director is presumed to have concurred in BoD action unless dissent or abstention is recorded in writing (minutes or letter to corporate secretary)

Front 30

Duties of directors to their own corporation and shareholders

Back 30

1. Duty to manage

4. Duty of Care

5. Duty of Loyalty

Front 31

Directors’ duty to manage the corporation

Back 31

directors may delegate management functions tocommittee of one or more directors that recommends action to BoD

Directors are protected from liability by BJR - business judgment rule

Front 32

Business judgment rule

Back 32

Presumption that directors manage corp in good faith and in best interests of the corp and shareholders.

As such, directors not liable for innocent mistakes of business judgment

Front 33

Directors’ duty of care

Back 33

act with the care a prudent person would use in managing her own affairs unless articles have limited director liability for a breach of duty of care

Front 34

Directors’ duty of loyalty

Back 34

director may not receive an unfair benefit to the detriment of the corp or its shareholders unless there has been:

a) material disclosure and

b) independent ratification

Front 35

Directors’ duty of loyalty: self-dealing

Back 35

director who receives an unfair benefit to herself in a transaction with her own corporation

Front 36

Directors’ duty of loyalty: usurping corporate opportunity

Back 36

director receives an unfair benefit by usurping corp opportunity which the corporation would have pursued

Front 37

Directors’ duty of loyalty: independent ratification

Back 37

Directors may defend a claim by obtaining:

i. majority vote of independent directors

ii. majority vote of a committee of at least 2 independent directors

iii. majority vote of shares held by independent shareholders

Front 38

Corporate officers

Back 38

1. owe same duty of care/duty of loyalty as directors

2. are agents of corp and bind corp by their authorized activities

3. corps must have a president, secretary, and treasurer

4. directors have unlimited power to select officers, may remove them from office at any time, but corp will be liable for breach of K damages

Front 39

Indemnification of officers and directors

Back 39

1. corp may NEVER indemnify director or officer who lost lawsuit to his own corporation

2. corp MUST ALWAYS indemnify a director or officer if they have won a lawsuit against any party (including corp itself)

3. corp MAY indemnify if:

---a. liability to third-parties or settlement with corp

---b. director or officer shows that she acted in good faith and believed conduct in best interest of corp

Front 40

Who may grant indemnification to directors/officers

Back 40

i. majority vote of independent directors

ii. majority of a committee of at least 2 independent directors

iii. majority of shares held by independent shareholders

iv. a special lawyer could recommend it

Front 41

Shareholder derivative suits

Back 41

in a derivative suit, shareholders is suing to enforce corporation’s cause of action (ask: could corp have brought suit?)

Front 42

Requirements for a derivative suit

Back 42

a. contemporaneous stock ownership (must own at least 1 share of stock when the lawsuit arose and throughout litigation)

b. must generally make demand on directors that they cause their own corp to bring suit;

demand must be made and rejected by the board (or futile), or at least 90 days must have passed since the demand was made

Front 43

Which shareholders can vote

Back 43

Record Date owners.

Record Date = voter eligibility cutoff date set by board on a day w/in the 70 day period leading up to the meeting. Even if you sell those shares after the record date

Front 44

Requirements for voting by proxy

Back 44

i. writing (fax or email ok)

ii. signed by record shareholder

iii. directed to secretary of corp

iv. authorizing another to vote the shares

v. valid for 11 months

Front 45

Revocability of proxies

Back 45

Generally proxies are revocable. There is an exception if the following two requirements are met:

i. labeled irrevocable; and

ii. coupled with an interest / consideration

Front 46

Annual shareholder voting meeting

Back 46

-every corporation must have an annual meeting at which at least 1 director position is open for election

-notice requires time and place of annual meeting

Front 47

Specially noticed special meeting

Back 47

a special meeting is a meeting to vote on a proposal or fundamental corporate change

may be called by board, president, or holders of 10% of voting shares

notice must give special purpose for meeting, or else action taking is void

nothing not in notice can happen at that meeting

Front 48

Quorum

Back 48

requires a majority of all shares be represented in person or in proxy when the meeting starts. Focuses on number of shares represented (not shareholders)

Front 49

Vote

Back 49

votes cast in favor must exceed those votes cast against the proposal by one share

(ignore absentions/no votes)

Front 50

Voting trust

Back 50

(Hard way)

It is a formal delegation in writing of voting power to a voting trustee for up to ten years.

a. written trust agreement

b. typically filed with corp

c. transfer shares to voting trustee

d. shareholders get trust certificates

e. shareholders retain all other rights except for voting

f. 10 year duration (unless extended by agreement)

Front 51

Shareholder voting agreement

Back 51

(easy way)

It is an agreement in writing to vote shares as required by the agreement itself which is now binding on all signers. (valid and enforceable)

Front 52

Straight voting for directors

Back 52

your number of shares to vote for each director (separate director elections)

default rule is straight voting, unless cumulative voting is expressly granted in the articles

“If you own 1,000 shares, you may case 1,000 votes for Martha in nine separate elections.”

Front 53

Cumulative voting for directors

Back 53

multiply your number of shares times the number of open slots (only have one election)

“You have 9,000 votes to pool for Martha.”

Cumulative voting gives minority voters power. The top 9 vote-getters will win.

Front 54

Dividends

Back 54

to be declared at BoD’s discretion, unless corp insolvent or would be rendered insolvent by dividend

BoD personally liable for unlawful distributions

(but have a defense of good faith reliance on financial officer’s representations of solvency)

Front 55

Dividends: common stock

Back 55

common shares get paid last, and get paid equally

Front 56

Dividends: preferred stock

Back 56

preferred shares get paid first. “First, 20,000 shares of $2 peferred must receive a total of $40,000. The remainder is divided equally among the remaining common shares.”

Front 57

Dividends: preferred stock that are participating

Back 57

get paid twice!

get paid first as a preferred stock, then get paid again as if they are also a pure common shares

Front 58

Dividends: preferred stock that are cumulative

Back 58

(and no dividends X prior years).

Add up, add up, add up

gets paid first (this year + X) times

Front 59

Closely held corporation (definition)

Back 59

shareholder agreements to eliminate corporate formalities

Front 60

Closely held corporation (formation)

Back 60

1. unanimous shareholder election evidenced in writing (in articles, bylaws, or some agreement) to eliminate formalities; and

2. some reasonable share transfer restriction

Front 61

Upside consequences of closely held corporations:

Back 61

1. no veil piercing even if you fail to observe formalities

2. possible sub-chapter S corp status

Front 62

S-corp status

Back 62

deemed a partnership for tax purposes

Front 63

S-corp requirements

Back 63

i. no more than 100 shareholders, and

ii. only one class of stock

Front 64

Professional corporations

Back 64

(1 profession + limited liability)

1. corporations formed by licensed professionals - (lawyer, accountant, medical professional) designated PC

Front 65

Professional corporations (requirements)

Back 65

i. organizers file articles with name designated “PC”

ii. shareholders must be licensed professionals

iii. corp may practice only one designated profession

iv. professionals are liable personally for their own malpractice

v. professionals are not liable personally for each other’s malpractice (or the obligations of the corp itself)

Front 66

Shareholder liability

Back 66

1. shareholders generally not liable

2. except

---a. piercing corporate veil

---b. controlling shareholders owe a fiduciary duty to minority shareholders

---c. controlling shareholders liable for selling corporation to a looter (unless reasonable measures taken to investigate buyer’s reputation and plans for corp)

Front 67

Types of fundamental corporate changes

Back 67

1. merger (A becomes B), consolidation (A & B become C), dissolution (A dissolves)

2. fundamental amendment of articles

3. sale (not purchase) of substantially all of corp’s assets

Front 68

Procedural steps for making fundamental corporate change

Back 68

1. resolution by BoD at a valid meeting

2. notice of special meeting

3. approval by majority of all shares that are entitled to vote

and also by a majority of each voting group that is adversely affected by the change

5. file notice w/ state (ie Articles of Merger)

Front 69

fundamental corporate change: exception to requirement for approval by majority of all shares that are entitled to vote

Back 69

except: no shareholder approval required for “short form” merger where parent that owns 90% or more of the stock in its subsidiary merges with the subsidiary.

Front 70

4. possibility of dissenting shareholder rights of appraisal

Back 70

a. a shareholder who does not vote in favor of a fundamental change has the right to force the corp to buy her shares at fair market value

b. actions by shareholder to perfect the right

---i. before shareholder vote, file written notice of objection and intent to demand payment

---ii. don’t vote in favor of proposed change

---iii. make prompt written demand to be bought out

c. If shareholder and corporation cannot agree on the fair market value, the court in every state has the power to appoint an expert appraiser to value the shares, and the appraisal is binding on the parties.

Front 71

10b5

Back 71

- anti fraud - SEC act of 1934

Front 72

elements of liability under 10b5

Back 72

a. scienter - intent to deceive

b. deception -

c. in connection w/ actual purchase or sale of securities

Plus, in a private action for damages, investors must prove:

d. reliance - investors actually relied on fraud, or invested at a market price infected by fraud

e. loss causation - fraud caused their economic loss

Front 73

Types of deception under 10b5

Back 73

i. liar - misrepresentation of material fact, or failure to disclose material fact in breach of fiduciary duty to disclose

ii. insider trading

---a. misappropriator - one who steals material nonpublic info and uses it to purchase/sell securities

---b. tipper - one who tips inside info for personal benefit to another who trades on it

---c. tippee - one who receives info and trades on it w/ knowledge that the info was disclosed in breach of tipper’s fiduciary duty

Front 74

16b

Back 74

short swing trading profits

Front 75

Application of 16b

Back 75

Strict liability for:

a. big corps - reporting corp listed on national exchange or at least 500 shareholders and $10 mil in assets

b. big shot defendant - officer, director, or owner of more than 10% shareholder

c. may not buy and sell stock within a 6 month period (fraud and inside info are not required)

Front 76

Recovery under 16b

Back 76

all profits from 16b violations are recoverable by corp if within 6 months before or after any sale there was a purchase at lower price than sale price, there is a profit

Front 77

Sarbanes Oxley

Back 77

no knowingly false filings. Plus, no benefits during falsehoods or blackout periods.

Front 78

Sarbanes Oxley reporting requirements for big companies

Back 78

b. CEO/CFO must certify that based on officer’s knowledge reports filed with SEC

---i. do not contain material misrepresentations or omissions

---ii. fairly represent financial position of company

Front 79

Remedies under Sarbanes Oxley

Back 79

c. 5 mil fine, 20 years in prison

d. if false profits have to be corrected and restated, may recover officer’s profits made from trading company’s securities w/in 12 months after false reports filed and may recover incentive based compensation during that period

e. can also recover profits by officer from trading corp’s stock during “black out” periods of at least 3 days when at least 50% of employees are prohibited from trading in their retirement plan’s securities

Front 80

Duty of Loyalty Issues

Back 80

(1) Insider trading

(2) Self-dealing (Interested director transaction)

(3) Corporate Opportunity

(4)Compete with corporation

Front 81

Duty of Care Issues

Back 81

(1) good faith

(2) due care of ordinarily prudent person

(3) best interest of corporation

(4) Business Judgment Rule

Front 82

Tipper Liability

Back 82

a. If an insider gives a tip of inside information to someone else who trades on the basis of the inside information, the tipper can be liable under 10b-5 if the below elements are met.

b. elements:

---i. Tipper must be an insider

---ii. Tipper must have an improper purpose

---iii. Tipper must receive some personal gain (monetary or reputational)

Front 83

Tipee Liability

Back 83

A Tippee is liable under 10(b)(5) if:

i. Tipper breached

ii. Tippee knew that tipper was breaching

iii. Tippee bought or sold stock via ISC