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62 Cards in this Set
- Front
- Back
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Certificate of Incorporation (Articles of Incorporation)
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Spells amount, and types of stock that may be issued, and any special characteristics of the corporation
This is the corporation's "contract" with the state Filing beings corporate existence Contains "scope of authority" Required Provisions: 1. Name: must include words that identify it as an entity 2. Agent: Name/address of resident agent in state 3. Authorized Shares: Maximum number of shares corporation is authorized to sell 4. Board Members: Names/addresses of the first board of directors and provisions related to changing the number of directors 5. Incorporators: name/address of the people executing the certificate of incorporation |
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Bylaws
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Written rules of conduct for the corporation (govern within the corporation itself, unlike Articles of Incorporation, which is contract with the state)
Provide for meetings, elections of board of directors and officers, filling vacancies, notices, types and duties of officers, assessments and other ordinary business conduct Bylaws are contracts that must be formally adopted and/or amended LLC's or close corporations may have "operating agreements" which fulfill the same function as bylaws |
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De Facto Corportation
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Company which operates as if it were a corporation although it had not completed the legal steps (failed to file its certificate, etc.)
Court may temporarily treat it as a corporation in order to avoid unfairness to people who thought the corporation was legal It is critical that they acted in GOOD-FAITH RELIANCE |
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Corporation by Estoppel
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Prevents an entity that had prior dealings with a defective corporation from denying the corporation's existence in a later suit.
Since entity was able to allege corporation existed to its benefit, it should be estopped from now alleging that it did not exist |
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Promoter Liability: Contractual
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Promoter that enters into a contract with a 3rd party on behalf of a corporation that:
1. BOTH PARTIES KNOW IS NOT YET FORMED 2. Is PERSONALLY LIABLE on the contract 3. UNLESS THE OTHER PARTY AGREES TO LOOK SOLELY TO THE CORPORATION FOR PERFORMANCE There is a rebuttable presumption that parties intended promoter to be a party to the agreement |
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Promoter Liability: Novation
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Promoter is not released from liability unless there is a NOVATION
Adoption of the contract by the corporation after formation DOES NOT release the promoter from liability without a novation NOVATION: when the other party agrees to release promoter from liability and look solely to the corporation |
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Promoter Indemnification
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A promoter that has not violated any fiduciary duties to the corporation but is held liable on a pre-incorporation contract will be able to obtain INDEMNITY from the corporation
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Liability of the Corporation for Pre-Incorporation Contracts
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Upon incorporation, the corporation is NOT automatically bound by contracts formed by promoters
The corporation will not be bound until it ADOPTS the contract ADOPTION can be express or inferred from the action of the corporation or its agents (ex: accepting the benefits of the contract) |
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Subscription for Shares
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A subscription for shares is an offer to purchase shares made to a corporation by a person or entity seeking to become a shareholder
A subscription for shares is irrevocable for 6 months unless: 1. Otherwise provided by the terms of the subscription 2. If the parties consent to revocation Payment must be made ON DEMAND by the corporation But if the corporation makes a demand for payment, it must be UNIFORM as to all shares of the same class or series |
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Piercing the Corporate Veil
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The major exception to the general rule that shareholders of a corporation are not personally liable for the debts of the corporation
Courts will pierce when circumstances indicate that the privilege has been misused or when necessary to do justice. Grounds for Piercing Include: 1. Alter Ego --Courts will allow a creditor to pierce and hold shareholder personally liable when shareholder has dominated the corporation to the extent that it may be considered the shareholder's "alter ego" 2. Fraud, illegality, or estoppel 3. Undercapitalization 4. Disregard of corporate formalities |
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Piercing: Who is Liable?
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Generally, when courts pierce the veil, all of the shareholders can be held liable
But some courts do not extend liability to mere "passive" investors This is particularly true when the court is using the "alter ego" ground for piercing the veil |
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Piercing: Related Corporations
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Keep in mind that there can be two separate piercings in a single question
A court can pierce and hold a parent company liable for the obligations of its subsidiary Grounds for holding parent company liable: 1. Formalities of separate corporate procedures of each corporation not observed 2. Corporation inadequately financed as a separate unit ("adequate capitalization" means enough "to meet its normal obligations foreseeable in a business of its size and character") 3. Policies of the corporation are not directed primarily toward its own interests but rather to those of the other corporation |
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Piercing: Shareholder as Tortfeaser
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Be sure to address the possibility of personal liability of the tortfeaser AND the possibility of piercing the corporate veil
General Rule: shareholder is PERSONALLY LIABLE for torts committed while acting as an agent of the corporation, even if the shareholder was acting at the command of the corporation |
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Dividends and Distributions
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Dividends and Distributions are usually paid at the discretion of the board members
BUT: the board MAY NOT authorize distribution if it would: 1. Leave the corporation unable to pay its debts as they come due in the usual course of business; or 2. Corporate assets would be less than the sum of its liabilities plus the amount needed to satisfy preferential rights should the corporation be dissolved If board of directors refuses to issue dividends in BAD FAITH (but not necessary bad judgment), the shareholder may be able to compel distribution |
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Shareholder Meetings
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Annual Meetings: Corporation must hold annual meetings at a time fixed in accordance with the bylaws
Corporation can hold "Special Meetings" by demand of 10% of the shareholders If shareholders want to take an action without a meeting they need the signed, written consent of all shareholders entitled to vote |
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Notice to Shareholders
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All shareholders entitled to vote must be provided with notice of all annual and special meetings
"Timely Notice": Notice must be provided between 10-60 days before the meeting or else the meeting is not properly called |
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Quorum
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Quorum refers to the number of votes entitled to be cast by the voting group.
Usually must be a majority of the votes entitled to be cast on a matter Certificate of Incorporation may provide greater quorum requirement |
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Shareholder Voting
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Non-voting shares possess right to notice of a vote
All shareholders votes are counted equally, regardless of class (unless altered by the Certificate of Incorporation) Shareholder only entitled to vote if she became a shareholder before the "Record Date" "Record Date" is noted in the notice for the meeting |
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Cumulative Voting
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Cumulative voting is a method by which voters cast as many votes as there are seats and voters are not limited to giving only one vote to a candidate
This is a means of providing fair representation of the minority shareholder's interests |
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Vote by Proxy
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Proxy vote is when a person properly authorizes another person to vote her shares
To be valid, the proxy must exist in verifiable electronic transmission or written appointment form signed by the person authorizing the other to vote Proxy should be accepted as valid if on its face it appears to be "free from all reasonable grounds of suspicion of its genuineness and authenticity" Written Proxy: revocable unless coupled with an interest "Coupled with an Interest": when the recipient of the proxy has an economic interest in the shares |
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Voting Trusts
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Voting Trusts are agreements among shareholders to vote a certain way
Generally created for a limited time only but may be extended by written agreement Agreement must be in writing and filed in the registered office of the corporation |
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Right to Inspect Corporate Books/Records
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Shareholders possess a right to inspect corporate books and records for a "proper purpose"
"Proper Purpose": a purpose reasonably related to an individual's interest as a shareholder Ex: Determination of the value of shareholder's shares for purpose of sale |
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Directors
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Directors are the people who decide on the ultimate business decisions made on day-to-day basis
Must be natural person and at least 18 years old Corporation must have at least one director Certificate of Incorporation or Bylaws may fix a number or range of directors Voting agreements between board members are VOID and unenforceable because they violate the fiduciary duty to the corporation |
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Authority of Directors
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Subject to certificate of incorporation, the board of directors has full control over the affairs of the corporation
Directors may make and amend bylaws (unless shareholders are in charge of enacting bylaws) Directors may fill vacancies on the board |
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Directors' Exercise of Authority
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Valid vote requires a QUORUM of directors
A resolution is approved if approved by a MAJORITY OF THE DIRECTORS PRESENT Directors only need notice of special meetings (presumed to have notice of annual meetings) Directors can take informal action by UNANIMOUS WRITTEN CONSENT of the board |
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Action by Committee
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Directors can delegate daily operations of corporation to an executive committee of its officers
But the Board MAY NOT avoid legal responsibility or liability my means of delegation Board MAY NOT delegate fundamental decisions |
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Directors' Objection to Actions
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To avoid being held liable for an action taken by the Board, a director must raise an affirmative objection to preserve his right to object at a later proceeding
Shareholders that do not attend the meetings because they did not receive proper notice are deemed NOT to have waived their objection |
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Duty of Care (Procedural Duty)
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Must act on informed basis, in good faith, in the honest belief that the action taken is in the best interests of the corporation.
RMBCA: Directors required to discharge their duty "in good faith and in a manner the director reasonably believes to be in the best interests of the corporation." When becoming informed to make a decision, directors must discharge their duty "with the care that a person in a like position would reasonably believe appropriate under similar circumstances." Duty of Care is procedural not substantive This includes: 1. Duty of Good-Faith 2. Business Judgment Rule 3. Duty to take reasonable steps to monitor corporation's management 4. Duty to remain informed about corporation's business 5. Duty to be satisfied that proposals are in the best interests of the corporation |
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Duty of Good Faith
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Duty of Good Faith requires a fiduciary discharge his duties "in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner he reasonably believes to be in the best interests of the corporation."
If a fiduciary makes a mistake, ask: Would a reasonable person in a similar position not have made the mistake? |
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Business Judgment Rule
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Legal presumption that business decisions are presumptively correct. Absent a showing that the directors violated a fiduciary duty to the corporation or committed fraudulent or illegal acts, the court will not second-guess their judgments.
Ask: was it reasonable UNDER THE CIRCUMSTANCES (NOT in hindsight)? |
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Limitation of Liability
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Certificate of Incorporation may reasonably limit the liability of officers and directors for bad judgment but NOT FOR BAD FAITH MISCONDUCT IN, OR RELATIVE TO, THE DISCHARGE OF THEIR DUTIES
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Duty of Loyalty
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Directors and Officers have a duty to avoid implicating their personal interests
Their personal interests may not conflict with the interests of the corporation |
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Duty of Loyalty: Interested Transactions: Does a conflicting interest exist?
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Identify all 3 issues:
Issue 1. Does a conflicting interest exist? a) Director is party to a transaction; or b) Has a beneficial financial interest in the transaction c) Of such financial significance that d) The interest would reasonably be expected to exert an influence on the director's judgment |
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Duty of Loyalty: Interested Transactions: Required Disclosure Regarding Conflicting Interests
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Issue 2: Required Disclosure Regarding Conflicting Interests
Board cannot authorize a transaction unless interested director discloses: "all facts known to him respecting the subject matter of the transaction that an ordinarily prudent person would REASONABLY BELIEVE TO BE MATERIAL TO A JUDGMENT ABOUT WHETHER OR NOT TO PROCEED WITH THE TRANSACTION" |
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Duty of Loyalty: Interested Transactions: Safe Harbor
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Issue 3: Safe Harbor
Director that enters into an interested transaction may be protected from liability under 1 of 3 "Safe Harbors": 1. Authorization of Interested Transactions after their Disclosure --Non-interested directors can vote to approve the transaction --Must be more than 1 "qualified" directors 2. Approval of Transaction by Disinterested Shareholders; or 3. Fairness to the Corporation |
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Sales of Substantially All of Corporate Assets
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General Rule: For a corporation to "sell, lease, exchange of dispose of all or substantially all" of is property there must be shareholder approval
Ordinary Course of Business Exception: If the sale occurs in the "usual and regular" course of corporate business (corporation flips property, etc.) then shareholder approval not needed Sales of Substantially All of Corporate Assets trigger "Dissenter's Rights" |
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Involuntary Dissolution (Close Corporations)
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If Directors act in a way that is illegal, oppressive, or fraudulent, a court may dissolve the corporation
In Close Corporations, there is generally a higher fiduciary duty to minority shareholders than in a normal corporation Attempts to "freeze-out" minority shareholders are oppressive if majority shareholders profit from the corporation to the detriment of minority shareholders Defining "Oppression": 1. Some courts define as "violating the reasonable expectations of shareholders 2. Other courts hold that majority shareholders in Close Corporations have higher fiduciary duty to minority shareholders and so "are required to deal fairly, honestly and openly with minority shareholders and may not use their corporate control to prevent the minority from having an equal opportunity in the corporation." Buyout Option: If a dissolution begins, the corporation may terminate it if a shareholder (or the corporation) purchases the complaining shareholder's shares for fair value (Buyout) |
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Share Transfer Restrictions in Close Corporations
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Share Transfer restrictions are included in Certificate of Incorporation and provide that shares cannot be transferred without the prior consent of a majority or all of the Board of Directors and/or Shareholders
--Unanimous is much more restrictive--less likely to be valid Transfer Restrictions are valid if reasonable and for a lawful purpose --Absolute restraints on alienation of stock are PER SE unreasonable and void --Keeping corporation in the family is a lawful purpose If the restriction is enforceable against the selling shareholder it must STILL be determined whether it is binding on the transferee, as well Enforceable against transferee if: 1. He had ACTUAL notice of the restriction; or 2. The restriction is CONSPICUOUSLY NOTED ON THE STOCK CERTIFICATE (constructive notice) If the restriction is only noted in the articles of incorporation it will NOT be enforceable against a transferee |
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Shareholder Litigation: Derivative Claims
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Shareholder can sue to enforce THE CORPORATION'S RIGHTS when there has been:
1. A breach of director's fiduciary duties that depletes or diverts corporate assets and injures the corporation (including all the shareholders) 2. Shareholder has made a demand on corporation to enforce it's rights; and 3. Corporation has failed to do so |
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Derivative Claims: Demand
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Under the RMBCA: There must be written demand on the board then shareholder must wait 90 days to file a derivative action (unless the board rejects the demand during the 90-day period)
Common Law: Shareholder doesn't have to make a demand if it would be futile to do so --Must allege facts in the complaint that demonstrate a reasonable basis for belief that: 1. The members of the Board are interested in the transaction being challenged; or 2. Board failed to exercise Duty of Care in approving the matter at issue |
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Shareholder Litigation: Direct Claim
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Shareholder can bring a direct claim when there is a wrongful act that (instead of depleting treasury or diverting corporate assets) deprives a shareholder of a right to which his shares entitle him, or which is personal to the shareholder and not shared by other shareholders
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How Much is Stock Worth?
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Par: If stock is $3 par stock, it cannot be sold for less than $3
No Par: If the stock is no par, then Board of Directors sets the price. If stock is issued under par, it is treated as "watered stock" and the directors who knowingly authorized the issuance would be liable for the lost money. Person who bought the "watered stock" would also be liable because purchasers are charged with knowledge of part stock --But 3rd Parties are not liable if they bought the stock in good faith |
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Preemptive Rights
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If the Articles of Incorporation provide for "preemptive rights" then a shareholder can purchase additional stock whenever there is a new issuance of stock in order to maintain their % of ownership
Under RMBCA, corporation must "opt-in" to create preemptive rights by expressly including the right in its articles of incorporation. Exceptions: 1. These rights ONLY apply if the issuance is for money (compensation to officers of corporation do not trigger preemptive rights) 2. No preemptive rights exist for common shareholders with respect to preferred shares that are not convertible into common shares |
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Removal of Directors
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Directors can be removed by a majority of all shareholders entitled to vote
Can be removed "with" or "without" cause Straight voting: removed if the number of votes for removal exceeds the number of votes against removal Cumulative Voting: Director may NOT be removed if the number of votes sufficient to elect him under cumulative voting is voted against his removal. |
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How can Board of Directors take an action?
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A meeting that satisfies the QUORUM and voting requirements
Or Unanimous written consent by all directors to act without a meeting |
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How can a Director Shield Himself From Liability
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Good Faith reliance on:
1. Officers or employees reasonably believed to be competent; or 2. The opinion of a professional reasonably believed to be acting within their professional competence; or 3. Reliance on financial statements and other financial data |
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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 a 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 as long as the director or officer did not act in bad faith or with deliberate dishonesty
Disinterested directors determine eligibility |
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Different Types of Stock and Dividends
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Common Stock: everyone shares equally
Preferred Stock: The shareholders with preferred stock get their fixed amount first and then the common shares split the rest Preferred and Participating: Shareholders get their preferred stock first as 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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Issuing more Stock Options When All of the Authorized Shares have been Issued
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Corporation must have sufficient number of authorized shares to cover all issued and outstanding shares.
Articles of Incorporation state the number of authorized shares of the corporation If all have been issued and outstanding, corporation cannot issue more unless the Articles of Incorporation are amended to provide for additional authorized shares. Amending Articles of Incorporation requires approval of a MAJORITY of the Board of Directors and a MAJORITY of the Shareholders |
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Classes of Stock
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All shares within a class of stock must have identical rights and preferences unless the shares within a class are divided into separate series.
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Shareholder Voting on Actions and Directors
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Action: If a quorum exists, an action is approved if the votes in favor of the action exceed the votes against the action.
Directors: If a quorum is present, Directors are elected by a plurality of the votes cast at the meeting (most votes wins) |
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Duty of Loyalty: Usurping Corporate Opportunities
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"Corporate Opportunity" doctrine prohibits directors and officers from appropriating to themselves business opportunities that rightfully belong to the corporation.
Use "Unfairness" Standard May be liable for "disgorgement of profits" |
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Duties of Majority Shareholder to Minority Shareholder: Duty of Fair Dealing
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Duty of Fair Dealing: Majority shareholders must exercise duty of fair dealing when purchasing minority shareholders' interests.
Transaction subject to review to determine if majority shareholders fulfilled this duty Burden on Majority Shareholders to prove they utilized a fair process and selected a fair price |
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Duties of Majority Shareholders to Minority Shareholders: Duty to Disclose
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Duty to Disclose any information that majority shareholder knows or should know is material
Merger Transaction: If information regarding an acquiring corporation's offered price per share for a minority interest goes to the fairness of the parent corp's offered price per share, a reasonable shareholder would consider the materiality of this nondisclosure important when deciding how to vote on a proposed transaction But no obligation exists to disclose preliminary discussions regarding a merely potential merger transaction When a merger can be approved without votes of minority shareholders, they can exercise their rights pursuant to state's appraisal statute by receiving disclosure of a prospective merger. Minority shareholders only need to prove that nondisclosure deprived them of a state remedy that otherwise would have been available to them. |
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Merger
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When one of two existing corporations is absorbed by the other corporation
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Consolidation
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When two existing corporations combine into NEW corporation
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Mergers and Consolidations
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Require a 2-step vote:
1. Need recommendation of an absolute majority of the board of directors of each corporation; AND 2. Need an absolute majority of the shareholders of each corporation |
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When Shareholder Approval of a Merger is NOT Required
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Approval of a Merger by shareholders is NOT REQUIRED if ALL of the following conditions exist:
1. The corporation will SURVIVE the merger 2. Its Articles of Incorporation will not be changed 3. Each shareholder of the corporation whose shares were outstanding immediately before the effective date of the merger will hold the same number of shares, with identical preferences, limitations, and relative rights, immediately after the effective date of change; and 4. The VOTING POWER of any class of shares issued as a result of the merger or share exchange will comprise more than 20% of the voting power of the same class of shares of the surviving corporation that were outstanding immediately prior to the merger |
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Short Form Merger of Subsidiary
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Parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself WITHOUT THE APPROVAL OF THE SHAREHOLDERS OR DIRECTORS OF THE SUBSIDIARY.
Shareholders of the PARENT corporation must still vote, though unless not required (see card above) Parent must give the subsidiary's shareholders notice that the merger has become effective within 10 days after its effective date. |
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Dissenter's Rights
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Merger/Consolidation triggers dissenter's rights.
Dissenting shareholder may either challenge the action or receive payment determined at fair value defined as "the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable." Dissenting shareholder who opts to obtain fair value loses the right to challenge the corporate action absent a showing of fraud |
