Corporations

Front 1

DE JURE CORPORATION

Back 1

A corporation formed in accordance with all applicable laws is a de jure corporation and owners generally will not be held personally liable for the corporations obligations.

Front 2

MAKING THE DE JURE CORPORATION OPERATIVE

Back 2

After the articles are filed, an organizational meeting must be held for the purpose of:
1. adopting bylaws,
2. electing officers, and
3. transacting other business.

Front 3

FORMATION OF A DE JURE CORPORATION

Back 3

To form a de jure corporation the incorporators must file

articles of incorporation and

a certificate of disclosure
with

the corporate commission and

pay whatever fees the state directs.

Front 4

INCORPORATORS

Back 4

The persons who undertake to form a corporation.

An incorporator is simply the person who signs the articles of incorporation.

Under the Arizona Business Corporation Act, only one is necessary.

Another corporation may serve as an incorporator.

Front 5

ARTICLES OF INCORPORATION

Back 5

The Articles of Incorporation are a contract between the corporation and its shareholders and the corporation and the state.

It must contain

(1) the corporate name and address of the corporation's business;

(2) the name and address of each incorporator;

(3) the name and address of each initial director;

(4) and the name and address each statutory agent.

Also, a statement of purpose is required.

A statement of duration may be required if perpetual existence is not desired.

Front 6

DE FACTO CORPORATION

Back 6

A de facto corporation has all the rights and powers of a de jure corporation but

remains subject to a direct attack by the state.

Front 7

FORMATION OF A DE FACTO CORPORATION

Back 7

There must be a corporate law under which the organization could have legally been incorporated;

there must be colorable compliance or a good faith attempt to comply with the incorporation laws;

and the corporation must act like a corporation.

Front 8

CORPORATION BY ESTOPPEL

Back 8

A business may be treated as a corporation if persons treated the entity as such.

Those persons will be estopped from avoiding liability.

The doctrine applies to both the purported corporation and outsiders dealing with the purported corporation.

Front 9

PIERCING THE CORPORATE VEIL

Back 9

A person or entity can hold the shareholders, officers and directors individually liable where

(1) the corporate formalities were ignored;

(2) the corporation is under capitalized at the outset; and

(3) to prevent fraud.

Front 10

ALTER EGO THEORY

Back 10

If the shareholders treat the assets of the corporation as their own, use corporate funds to pay private debts, fail to keep separate corporate books, and fail to observe corporate formalities, courts often find the entity as an alter ego.

If a corporation is the alter ego, agent, or instrumentality of a sole proprietor or another corporation, its separate entity may be disregarded.

Front 11

BYLAWS

Back 11

Adoption of bylaws is not a condition precedent to formation of a corporation.

If bylaws conflict with the articles, the articles control.

Front 12

PROMOTER

Back 12

A promoter is the person who acts on behalf of the corporation not yet formed.

A promoter remains liable until their has been a novation unless the contract clearly says otherwise.

Front 13

NOVATION

Back 13

A novation requires that, the promoter, the corporation and the third party to a contract all agree that the corporation will replace the promoter.

Front 14

WHEN IS A CORPORATION LIABLE FOR PRE-INCORPORATION CONTRACTS

Back 14

A corporation is not liable for pre-incorporation contracts until it adopts the contract either expressly or impliedly.

Front 15

SECRET PROFIT RULE

Back 15

A promoter has a fiduciary duty to other promoters and the corporate entity.

A promoter is prohibited from secretly pursuing personal gain at the expense of their fellow promoters or the corporation.

Promoter liability will arise for breach of fiduciary duty, fraud or misrepresentation, or for obtaining unpaid stock.

Front 16

FOREIGN CORPORATIONS

Back 16

A state has unlimited power to exclude or regulate foreign corporations other than those engaged in interstate commerce, since corporations are not citizens within the meaning of the Privileges and Immunities Clause. Usually a foreign company may not transact business in Arizona until it has filed an application for authority to transact business.

Front 17

DEBT SECURITY

Back 17

A security representing a loan given by an investor to an issuer. In return for the loan, the issuer promises to pay interest and to repay the debt on a specified date.

Front 18

EQUITY SECURITY

Back 18

An equity security is a security representing an investment in the corporation. In return the holder becomes a part owner of the business.

Front 19

ISSUANCE

Back 19

Issuance of stock occurs when a corporation sells or trades its own stock. It is a way in which a corporation can raise capital.

Front 20

SUBSCRIPTIONS

Back 20

A subscription is a written offer to purchase shares from the corporation. Subscriptions can be made to existing corporations and corporations to be formed. A preincorporation subscription is irrevocable for six months unless otherwise provided. A subscription does not become a contract until it is accepted by the corporation.

Front 21

CONSIDERATION

Back 21

The ABCA allows stock to be issued in exchange for any tangible or intangible property or benefit to the corporation. It excludes future services and promissory notes.

Front 22

PAR VALUE

Back 22

Par Value has been eliminated in Arizona. The ABCA allows corporate directors to issue stock for whatever consideration they deem adequate.

Front 23

PREEMPTIVE RIGHTS

Back 23

Preemptive rights are the rights of existing shareholders to maintain their percentage of ownership by buying stock whenever there is a new issuance of stock. To do so the shareholder must purchase enough stock to maintain percentage.

Front 24

STATUTORY REQUIREMENTS - DIRECTORS

Back 24

Unless provided for otherwise, the board of directors has the general reponsibility for the mangement of the business and the affairs of the corporation.

Front 25

DUTIES AND RESPONSIBILITIES OF DIRECTORS

Back 25

Directors have a fiduciary duty to the corporation. This includes the duty of due care, duty of loayalty, and the duty to protect the interests of other intracorporate parties.

Front 26

DIRECTOR'S DUTY OF CARE

Back 26

A director must act in good faith, with the reasonable belief that her actions are in the corporation's best interest, and with the care that a prudent person in like position would use.

Front 27

SELF DEALING

Back 27

Any deal between the corporation and one of its directors (or a directors relative) is prohibited unless the transaction was approved by a majority of directors and shareholders entitled without a conflicting interest and it is judged fair to the corporation.

Front 28

DIRECTOR'S DUTY OF LOYALTY

Back 28

Directors and officers must act in good faith in the best interests of the corporation without regard to personal gain. Common breachs of this duty are:
1) Insider Trading
2) Self-Dealing
3) Liability for passive participants
4) Other Duties

Front 29

COMPETING VENTURES AND CONFLICTING INTERESTS

Back 29

In Arizona, a director cannot compete directly with the corporation unless the transaction was approved by a majority of directors and shareholders entitled without a conflicting interest and it is judged fair to the corporation.

Front 30

CORPORATE OPPORTUNITY DOCTRINE

Back 30

Directors are prohibited from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act.

Front 31

COMMON LAW INSIDER TRADING

Back 31

Federal statutes control most insider trading litigation. A director has a duty to disclose to the person with whom the director is negotiating any special circumstances that may have a significant impact on the value of the stock or on negotitations.

Front 32

AMENDMENTS MADE WITHOUT SHAREHOLDER APPROVAL

Back 32

Unless the articles provide otherwise, a corporation's board of directors may amend the articles without shareholder action to:
1. Extend the duration of the corporation;
2. Delete the names and addresses of the initial directors or initial statutory agent;
4. Change the authroized number of shares, as long as there is only one class of shares outstanding;
5. Change the corporate name by substituting a differnet word or abbreviation

Front 33

DIRECTOR LIABILITY

Back 33

A director is presumed to have concurred with board action unless she objects at the outset to the transaction or unless her dissent or abstention is noted in writing in the corporate records.

Front 34

OFFICERS STANDARDS OF CONDUCT

Back 34

If an officer has discretionary authority with respect to any duties, an officer's duties shall be discharged under that authority:
1. In good faith.
2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances.
3. In a manner the officer reasonably believes to be in the best interests of the corporation.

Front 35

SARBANES-OXLEY ACT

Back 35

Only effects those companies whose shares are traded on a national securities exchange. It prohibits loans to excutives in publicly-traded companies.

Front 36

NO INDEMNIFICATION OF DIRECTORS AND OFFICERS

Back 36

A personsued in her capacity as director or officer can not seek indemnification if she was held liable to the corporation or held liable on the basis of improper benefit.

Front 37

SHAREHOLDER DIRECT CONTROL

Back 37

Generally shareholders have no right to day-to-day control over the corporation. ABCA does allow for some departure from this rule. They may by agreement restrict the discretion or powers of the board, govern the authorization or making of distributions, establish who shall be directors, govern the exercise of voting power, etc.

Front 38

SHAREHOLDER INDIRECT CONTROL

Back 38

Shareholders may elect and remove directors and modify bylaws. Shareholders must approve all fundamental corporate changes.

Front 39

SHAREHOLDER LIABILITY

Back 39

Generally a shareholder is not liable for the acts or debts of the corporation unless the court pierces the corporate veil to avoid fraud or infairness.

Front 40

UNDERCAPITALIZATION

Back 40

A situation in which a company does not have enough unencumbered capitalreasonably adequate for its prospective liabilities. If a company is undercapitalized at incorporation shareholders may be held personally liable.

Front 41

SHAREHOLDER MANAGEMENT STATUTORY CLOSE CORPORATION

Back 41

If the corporation is not listed on a national securities exchange , or its shares are not publicly traded, shareholders can enter an agreement restricting the power of the board and vesting it in shareholders or others.

Front 42

PROFESSIONAL CORPORATION

Back 42

Professionals may incorporate as a professional corporation. The articles must provide that it is a professional corporation and that its purpose is to render the specified professional services.

Front 43

SHAREHOLDER DERIVATIVE SUITS

Back 43

When a shareholder sues to enforce a corporate claim, not her personal claim. A deriviative suit may be filed against the corporation's directors or a third party if the board is unwilling to do so.

Front 44

CORPORATION ADVANTAGES AND DISADVANTAGES

Back 44

1. Limited Liability
2. Centralized Management
3. Transferability of Ownership
4. Continuity of Life

1. Double taxation
2. Formalities and expenses of forming and running a corporation

Front 45

SHAREHOLDER VOTING

Back 45

Unless otherwise provided for in the articles, each outstanding share, regardless of class, is entitled to one vote on a matter to be voted on at a shareholder's meeting.

Front 46

STOCK TRANSFER RESTRICTIONS

Back 46

Shareholders in a corporation may freely transfer their ownership by selling her shares unless some reasonable stock transfer restriction is in place.

Right of first refusal is almost always reasonable.

Front 47

SHAREHOLDER RIGHTS TO INSPECT AND COPY BOOKS

Back 47

Any shareholder for at least six months or who will be the holder of at least five per cent of all of the outstanding shares of a corporation is entitled to inspect and copy any of the records of the corporation during regular business hours at the corporation's principal office, if the shareholder gives the corporation written notice of its demand as provided at least five business days before the date on which it wishes to inspect and copy.

Front 48

DISTRIBUTIONS

Back 48

Distributions are payments to shareholders declared in the board's discretion, in its business judgment.

They can be in the form of:
1. dividends; or
2. repurchase of shares; or
3. redemption of shares (forced sale to corporation at price set in articles)

Front 49

FUNDAMENTAL CORPORATE CHANGE AND DISSENTING SHAREHOLDER RIGHTS

Back 49

A shareholder dissenting to a fundamental corporate change has a right of appraisal. It is the right to force the corporation to buy her shares at fair value.

Some emendments to the articles, a merger, disposition of substantially all assets not in the rgular course of business and disposition of shares in a share exchange will trigger this right.

Front 50

WHEN CAN A SHAREHOLDER BE HELD LIABLE?

Back 50

1. for unpaid stock;
2. under a pieced corporate veil; and
3. in the absence of a de facto corporation when the shareholder knew that there was no incorporation

Front 51

MERGERS

Back 51

ABCA provides that the basic procedure for a fundamental change be followed. Generally, the board of directors and the shareholders must approve. No shareholder approval is required in a short form merger. Remember Right of Appraisal.

Front 52

DISPOSITION OF ALL OR SUBSTANTIALLY ALL ASSETS

Back 52

A sale, lease, exchange, or other disposition of all or substantially all of the corporation's property outside the usual and regualar course of business is a fundamental corporate change and must follow the same procedures.

Front 53

EFFECT OF DISSOLUTION

Back 53

A corporation dissolved continues its corporate existence, but is not allowed to carry on any business except that which is appropriate to wind up and liquidate its affairs.

Front 54

VOLUNTARY DISSOLUTION OR DISSOLUTION BY CORPORATE ACT

Back 54

A voluntary dissolution is the termination of the corporate existence without judicial proceedings. It must be based on both the board of directors and shareholders approval.

Front 55

CORPORATIONS

Back 55

A corporation is a legal entity distinct from its owners.

Front 56

CERTIFICATE OF DISCLOSURE

Back 56

The certificate of disclosure must state whether any officer, director, trustee, incorporator, or person controlling more than 10% of the issued and outstanding common shares has been convicted of a felony or subject to an injunction involving crimes such as consumer or securities fraud.

Front 57

STATUTORY AGENT

Back 57

A statutory agent is the corporation's official legal representative and can receive service of process on behalf of the corporation.

Front 58

REMOVAL OF DIRECTORS

Back 58

By cause or without cause, unless the articles provide that removal may be only for cause. Shareholders can remove Directors by a Majority of those entitled to vote or by the court based on fraud or gross abuse.

Front 59

NOTICE OF MEETINGS

Back 59

Regular board meetings may be held without notice. Special meetings require at least two days notice.

Front 60

INITIAL MEETING

Back 60

After incorporation, the board must meet to appoint officers, adopt bylaws and carry on other business.

Front 61

ULTRA VIRES ACTS

Back 61

Corporation has powers expressly conferred upon it by either AoI or state statute. Any action outside of these expressed or implied powers is an ultra vires act.

Front 62

IMPROPER CONSIDERATION FOR STOCK EXCHANGE

Back 62

Stock exchanged for the following would be considered an improper exchange:
1) Future Services performed.
2) Good Will
3) Promissory Notes

Front 63

WHAT CAN BE IN BYLAWS?

Back 63

Anything that is not inconsistent with the articles of incorporation or the law.

Front 64

WHAT ARE THE CHARACTERISTICS OF A DE FACTO CORPORATION?

Back 64

"1. Colorable, good faith compliance with incorporation statute.

Front 65

WHAT IS THE EXCEPTION TO PROTECTION UNDER DE FACTO CORPORATION?

Back 65

If persons know that there is no incorporation, they are liable.

Front 66

WHAT IS THE EXCEPTION TO CORPORATION BY ESTOPPEL?

Back 66

It does not apply to tort victims (on the rationale that a tort victim does not allow himself to be injured in reliance on a business's status as a corporation).

Front 67

HOW IS A DE FACTO CORPORATION TREATED DIFFERENTLY FROM DE JURE CORPORATIONS?

Back 67

The state may seek dissolution of a de facto corporation in a quo warranto proceeding.

Front 68

ARE OFFICERS REQUIRED?

Back 68

The ABCA does not require a corporation to have any specific officers, but rahter provides that a corporation shall have the officers described in tis by laws or appointed pursuant to the bylaws.

Front 69

WHAT'S EASIER TO PIERCE THE VEIL -- TORT OR CONTRACT?

Back 69

Torts becaus contracting parties had a chance to see if the corporation was legitimate.

Front 70

WHAT DO YOU NEED IF YOU WANT CLASSES OF SHARES?

Back 70

Has to be prescribed in the Articles of Incorporation.

Front 71

WHAT IS A STOCK SUBSCRIPTION?

Back 71

Promise by subscribers to buy stock in the corporation when it's formed. Irrevocable for six months.

Front 72

WHAT IF A SUBSCRIBER DOES NOT PAY?

Back 72

He can lose his subscription as well as the amount he's already paid.

Front 73

IF A PROMOTER IS HELD PERSONALLY LIABLE ON A CONTRACT FOR THE CORPORATION, CAN HE GET REIMBURSED?

Back 73

Yes, to the extent the corporation benefitted.

Front 74

HOW DO SHAREHOLDERS EXERCISE POWER?

Back 74

Usually, just by voting power, election of directors, adoption of bylaws, and approval of fundamental changes.

Front 75

WHEN MUST SHAREHOLDERS HOLD MEETINGS?

Back 75

A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws. The court may order an annual meeting to be held if one was not held within the three months after the date specified in the bylaws or fifteen months after its last annual meeting.

Front 76

WHAT IS THE TIME REQUIREMENT FOR NOTICE OF SHAREHOLDER MEETING?

Back 76

Not less than 10 or more than 60 days before the meeting. Notice must state place, day, hour and, for special meetings, the purpose.

Front 77

WHEN CAN DIRECT SHAREHOLDER SUITS BE BROUGHT?

Back 77

For breach of fiduciary duty owed to the shareholder by an officer or director or any time the corporate entity could have brought suit but didn't.

Front 78

WHAT IS A DERIVATIVE ACTION?

Back 78

An assertion of wrongdoing on the part of the directors, by a shareholder, on behalf of the corporation at large. Recovery goes to the corporation.

Front 79

SHAREHOLDER DERIVATIVE SUIT REQUIREMENTS

Back 79

1. Stock ownership
2. Adequate representation of the other shareholders
3. Demand on corporation plus 90 days

Front 80

WHAT IS NEEDED FOR STANDING IN A DERIVATIVE ACTION?

Back 80

Shareholder must have been a shareholder at the time of the act or omission complained of, or become a shareholder through transfer by operation of law from one who was a shareholder at the time.

Front 81

WHAT IS NEEDED BEFORE A DERIVATIVE ACTION CAN COMMENCE?

Back 81

Shareholder must make a written demand on the corporation to take suitable action, then wait 90 days unless corporation says it's not going to do anything, or irreparable harm can result.

Front 82

HOW CAN A DERIVATIVE ACTION BE DISMISSED?

Back 82

If a majority of directors (but at least two) who have no personal interest find in good faith after inquiry that the suit is not in the corporation's best interests. Then, Plaintiff has to argue that dismissal not in corporation's best interests.

Front 83

IS THERE EVER A RIGHT TO DISTRIBUTION?

Back 83

Yes, upon dissolution. Otherwise, it's discretionary.

Front 84

QUORUM FOR DIRECTORS

Back 84

Quorum is majority unless articles or bylaws state otherwise.

Front 85

BUSINESS JUDGMENT RULE

Back 85

Directors who act reasonably and in good faith will generally not be held personally liable.

Front 86

WHAT IS A DIRECTOR'S DUTIES IF FACED WITH A CONFLICT?

Back 86

Disclose.

But remember, unless the articles or bylaws say otherwise, directors can set own compensation.

Front 87

WHEN CAN A CORPORATION INDEMNIFY A DIRECTOR/OFFICER?

Back 87

When the director acted in good faith; and believed that his condcut was in the best interests of the corporation and was not unlawful.

Front 88

SHAREHOLDER MEETINGS LOCATION

Back 88

Annual shareholders' meetings may be held in or out of this state at the place stated in or fixed in accordance with the bylaws. If no place is stated in or fixed in accordance with the bylaws, annual meetings shall be held at the corporation's known place of business.

Front 89

VOTING TRUSTS

Back 89

One or more shareholders may create a voting trust, conferring on one or more trustees the right to vote or otherwise act for them, by signing an agreement setting out the provisions of the trust and transferring their shares to the trustee or trustees. The agreement may contain any lawful provision not inconsistent with the purposes of the trust.

Front 90

VOTING AGREEMENT

Back 90

Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose.

Unless otherwise provided in the voting agreement, a voting agreement created under this section is specifically enforceable.

Front 91

AMENDING THE ARTICLES OF INCORPORATION

Back 91

A corporation may amend its articles of incorporation at any time to add or change a provision that is required or permitted in the articles of incorporation or to delete a provision that is not required in the articles of incorporation.

Front 92

GENERAL FUNDAMENTAL CHANGE PROCEDURE

Back 92

1. Resolution adopted by a majority of the board of directors.
2. Notice sent to all shareholders.
3. Approved by a majority of all votes entitled to be cast and by a majority of any voting group entitled to vote as a group
4. Formalized in the articles filed with the Arizona Corporation Commission.

Front 93

EXCEPTIONS TO DIRECTOR LIABILITY

Back 93

Absent directors and directors who in good faith rely on corporate officers or employees, professionals, committees to which they are not a member of or financial statements prepared according to RAP are not liable.

Front 94

OFFICERS AND THEIR AUTHORITY

Back 94

Officers are agents of the corporation. They can bind the corporation by acts taken within their authority. Authority may be expressly provided in the articles, bylaws, or by resolution or implied by virtue of an actual grant of authority or inherent from the office held.

Front 95

MANDATORY AND DISCRETIONARY INDEMNIFICATION OF DIRECTORS AND OFFICERS

Back 95

If the director or officer was the prevailing party on the merits or otherwise she is mandatorily indemnified. So long as she was not held liable, the director or officer may be indemnified at the discretion of the corporation.

Front 96

SHAREHOLDER RIGHTS

Back 96

A shareholder has rights conferred by state law, by the bylaws of the corporation and, if one has been adopted, by a shareholder's agreement These include the right to be notified of annual shareholders' meetings, to elect directors and to receive an appropriate share of any dividends.

Front 97

PROFESSIONAL CORPORATION REQUIREMENTS

Back 97

1. the name must contain words or abbreviations like "professional corporation" or "professional asociation;"
2. Thre profession can be performed only by duly licensed professionals;
3. Licensed professionals generally must hold at least 51% of the stock;
4. and at least half of the directors and the president must be a licensed professional.

Professionals remain personally liable for malpractice.

Front 98

STATUTORY CLOSE CORPORATION

Back 98

Statutory Close Corporations are corporations that have few shareholders and shares and are not publicly traded.

Front 99

CLOSE CORPORATION (GENERAL DEFINITION)

Back 99

Any corporation formed under a state's regular corporation statutes where the stock is not traded on an exchange

Front 100

STATUTORY CLOSE CORPORATION FORMALITIES

Back 100

They have relaxed formalities that allow the corporation to 1. do away with a board of directors
2. shareholders do not have to hold meetings.
3. shareholders can run the corporation, by way of a shareholder agreement
4. Shareholders can agree to have one vote per person, as in a partnership, as opposed to one vote per share

Front 101

SHAREHOLDER DUTIES IN A STATUTORY CLOSE COPORATION

Back 101

Shareholders in a statutory close corporation owe each other a fiduciary duty. This means they must act in good faith.

Front 102

SHARE EXCHANGE

Back 102

Only the shareholders of the corporation whose shares will be acquired in a share exchange need approve of the exchange. It is not considered a fundamental corporate change for the acquiring corporation.

Front 103

DISSOLUTION OF A CORPORATION DOES NOT...

Back 103

1. Transfer title to the corporation's property.
2. Prevent transfer of its shares or securities
3. Subject its directors or officers to different standards of conduct
4. Change quorum or voting requirements
5. Prevent commencement of a proceeding by or against the corporation
6. Abate or suspend a proceeding pending by or against the corporation or any officers, directors or shareholders
7. Terminate the authority of the statutory agent of the corporation.