Corporations

Front 1

Formalities

Back 1

State corporate statutes set forth the requirements which must be complied with before the corporation entity is deemed validly formed
1) Filing of articles of incorporation
2) Organizational meetings
3) Bylaws

Front 2

De Jure Incorporation

Back 2

(Full compliance of substantial compliance)
A de jure corporation arises when there has been substantial compliance with all of the mandatory conditons precedent to incorporation

Front 3

Substantial Compliance

Back 3

Substantial compliance with statutory requirement is sufficient for de jure status re completion of all mandatory conditions precedent

Front 4

Who can be held liable if the corporation becomes insolvent

Back 4

When a corporation becomes insolvent, creditors may attempt to hold shareholders, officers, and directors liable if it can be found that there was a defect in incorporation due to a failure to comply literally with statutory procedures

Front 5

De Facto Incorporation

Back 5

(Colorable compliance defense) A de facto corporation arises where there has been good faith compliance with all of the mandatory conditions precedent to the incorporation under a valid statute followed by the good faith exercise of corporate powers

Front 6

Colorable Compliance

Back 6

A failure to have the articles accepted by the Secretary of State will generally not qualify as substantial compliance but a good faith attempt may be held to constitute colorable compliance

Front 7

Good Faith

Back 7

Good faith requires at a minimum that the incorporators the unaware of the defect in the incorporation process and carry on in the belief that the corporate entity was validly formed

Front 8

Testable Issue re: filing Articles of Incorporations

Back 8

Upon filing of articles a de facto corporation is treated as a corporation with respect to its dealings with third parties and its status can only be attacked and invalidated at a quo warranto proceeding. Creditors cannot question the corporations status.

Front 9

Corporation by estoppel

Back 9

(defense)
A defect in incorporation can be serious enough to deny an entity de jue and de facto status. Neverthe less, a person who dealt with the entity as though it was corproation may be estopped from denying the corporate validity

Front 10

Third Party - dealing with corporation (contract)

Back 10

Third party must have dealt with the corporation believing it to be de jure. Theory will not protect the shareholders, officers, and directors who were aware of the defective incorporation (requires good faith)

Front 11

Can Corporation defend itself on it own invalidity?

Back 11

A corporation cannot maintain or defend an action by an outsider against it on the grounds of it own invalidity. Having dealt with the third parties as if it were a de jure corporation, the entity cannot avoid its corporate obligations

Front 12

Consequences of a defective formation

Back 12

1) common law view treated the associatin as a partnership wherein each owner is jointly and severally liable for the association's unsatisfiede debts
2) Modern law cases apply liability only to those who activiely involved themselves in the corporate management

3) management may be liable for breach of implied warranty of authority

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Piercing the Corporate Veil

Back 13

Shareholders may be subject to unlimited liabilities where corporate entity is case aside by a court of equity

Front 14

Two factors are required to establish adequate grounds for disregarding the corporate veil

Back 14

1) lack of corporate formaalities

2) Inadequate capilization- shareholders have not invested enough capital to meet the corporation's prospective business risks and obligations that could reasonably be expected to arise in that business

Front 15

Enterprise liability theory

Back 15

Affiliated corporations are considered fragments of one business enterprise where the subsidiary is wholly owned by the parent

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Effect of piercing veil

Back 16

majority - active shareholders liable

minority - all shareholders liable

Front 17

Deep Rock Doctrine (insalvency re bankruptcy)

Back 17

Where a corporation becomes insolvent,debts owning to shareholder may be subordinated to the cliams of other creditors, the effect being that the shareholders' claim against the corporation are not paid until all creditors are satified, secured or unsecured

Front 18

Promoter

Back 18

A promoter is one who participates in the formation of a corporation by securing the initial capital, arranging compliance with the legal formation requirements, and entering into necessary contracts on behalf of the corporation before it is formed

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Fidicuary duty to other promoters

Back 19

Promoters owe each other a fiduciary duty including a duty not to make a profit at the expense of the other promoters, noit to engage in secret dealings and a duty of full disclosure and fair dealing as to all matter pertaining to the corporation

Front 20

Fidicuiary duty to the corporation

Back 20

Promoters owe duty of full disclosure to the corporation tobe formed as to any dealings in which the promoter has a personal interest
1)not to profit secretly
2) before 10b 5

Front 21

Pre-Incorporation Transaction with Third Parties

Back 21

Agreements where the contract expressly provides for promoter's liability leave the promoter primarily liable even though the contract is for the benefit of the corporation

Front 22

Is the corporation automatically bound by a promoter's pre-incorporation?

Back 22

The corporation does not become automatically bound by a promoter's pre-incorporation contracts upon formation. The board has the right to weigh the merits in deciding where to approve the contract

Front 23

Remedies of promoter

Back 23

1) promoter may seek indemnification where the corporation has adopted the contract
2) Quasi-contractual relief: promoters can seek this remedy where the corporation retains the benefits

Front 24

Pre-incorporation stock subscription

Back 24

Offer from a potential shareholder to the corporation which was considered revocable at common law. Such subscription provides financial security to a new corporation

Front 25

Remedies for corporation - pre-incorporation stock subscriptions

Back 25

1) if the subscriber breaches, the corporation may sell the shares and withhold any deposits as a forfeiture

2) corporation may bring suit under the contract

Front 26

Defenses of shareholder

Back 26

1) corporation become materially different
2) denied participation in management and organization as a subscriber

3) the sale was fraudulently induced

Front 27

Post Incorporation subscriptions

Back 27

Revocable contract prior to acceptance (CA irrovcable) betwen corporation and subscriber for issuance/purchase of shares

Front 28

Coporate Adoption and Ratification

Back 28

The corporation doe not becme automatically bound by a promoter's pre-incorporation contract upon formation. The bourd of directior has the right to weigh the merits in deciding whether the corporation adopts the contract, promoter remains liable with the corporation as a guarantor

Front 29

Remedies Promoter

Back 29

1) may seek indemification

2) quasi contractual relief where the corporation retains the benefits

Front 30

Powers of Corporation

Back 30

1) expressed

2) implied - power to perform all other acts or transavctions which are reasonably necessary to carry out any of its express powers or authorized business

Front 31

Management and Control

Back 31

The right to manage the property and affairs of the corporation is vested in the board of directors and not in its shareholders

Front 32

Appointment of directors

Back 32

1) Articles and election

2) Directors can appoint vacancies or call for a special election by the shareholer

Front 33

Tenure of directors

Back 33

Directors hold office until the next annual meeting unless the articles specify otherwise
1) c/a - the majority shareholders could only remove a director from office for cause

2) Modern statute- allow the removal of a dircetor without cause through the majority vote of shareholders

Front 34

Functioning of the Board

Back 34

Corporate powers are generally exercised by or under the authority of hte board of directors meeting where there is a quorum present.

Front 35

Quorum Requirement

Back 35

The directors must act by quorum and absent any modification by the articles or the bylaws this means 51% of the directors must be present

Front 36

Notice Requirement

Back 36

Regular meeting - no notice required

Special meeting - advance notice is required to be given to every directoy within a reasonable time -void if no proper notice

Front 37

Delegation of board authority and board functions

Back 37

Decretionary powers - non delegable. The board is not permitted to delegate its policy making discretionary powers

Front 38

Delegation to outside management

Back 38

Any contract which delegates critical management function to independent contractors or non directors (shareholder) will mot likely be held invalid as an unlawful delegation of the board authortity

Front 39

Compensation and reimbursement

Back 39

1) No compensation for ordinary services unless provided for in articles or the bylaws

2) compensation permitted for extraordinary services (those rendered beyond the scope of the normal duties of a direct and for wshich he can recover the reasonable value is such service were property authorized, requested, or accepted

Front 40

Is a director who also serves as a officer or employee of the corporation entitled to compensation?

Back 40

Yes

Front 41

Doctrine of Waste

Back 41

All executive compensation is subject to the test of waste even where board approved. Where it is held to be unreasonable or excessive, it cannot be enforced against the corporation and can be enjoined

Front 42

Director's right of inspection

Back 42

1) unqualified right to inspect exists at any reasonable time

2) former director has only a qualified right (good cause)

Front 43

Directo may be legitimate creditor of the corporation if following are present

Back 43

1) debt liquidated - certain amount

2) debt unmatured - debt not yet due

3) debt uncontested

Front 44

Indemnification of directors

Back 44

Indemnification refers to the promise of the corporation to reimburse its officers and directors for expenses incurrred in defending suits brought against the individuals based on conduct undertaken while acting in their representative capacity on behalf of the corporation

Front 45

Officers

Back 45

The major officer of a corporation (President, Vice President, Secretary and Treasure) are elected and removed by the directors and answer directly to the board in their management of the corporation's day to day affairs

Front 46

Do officers receive compensation?

Back 46

Officers are entitled to receive reasonable compensation for their services to the corporation

Front 47

Shareholders Rights

Back 47

The shareholders suject to minimal ownership requirements, have the unqualified right to obtain a list of shareholders and their addresses

1) right to inspect books and records

Front 48

Shareholder Votings Rights

Back 48

Shareholders control the corporate indirectly to some extent through their voting rights: right to vote for

1) the election and removal of directors

2) To amend the articles or by laws

3) Sale of the corporation

Front 49

Eligibiltity to vote

Back 49

Shareholders are under a fiduciary duty to exercise good faith

1) straight vote - vote for each share held

2) cumulative voting (for directors ) Shareholder is given one vote for each share owned times each directors to be elected.

Front 50

Voting Trust

Back 50

Each shareholder transfer legal title to his share to a trustee in return for a transferable voting certificate which evidences equitable ownership of the shares involved and carried with it the right to dividends and other distribution

Front 51

Pooling Agreement

Back 51

Contract amoung shareholders whereby they agree ahead of time to votee their shares in a specified way for a specified period of time

Front 52

Proxies

Back 52

A proxy is a power of attorney given by a shareholder to someone else to exercise the voting right attached to his shares (writing required)

Front 53

Shareholder meeting

Back 53

Shareholders can act only at meetings duty called and notices at which a quorum is present by resoluton passed by a specified percentage of those present
1) annual meeting
2) special meetings
3) proper purpose required

Front 54

Preemptive right

Back 54

Allows shareholder to keep their proportionate intestes in the corporation through the right to subscribe to that amount of new shares in new issuance which will preserve that existing proportionate interest in shared held by them

Front 55

Duty of good faith

Back 55

Corporation action caused by controlling shareholders requires good faith action and fairness in all business affairs and dealings

Front 56

Sale of corporation

Back 56

1) Majority has duty to exercise good faith and fairness and not seel control to someone who will loot the corporation

Front 57

Resolution of disputes among shareholders

Back 57

1) provisional directors appointed by court to break board deadlock

2) arbitration

Front 58

Direct Action (by shareholder)

Back 58

where a shareholder is enforcing his own personal right for injury to his interest as a shareholder against the corporation. Suit is in the name of the shareholder against the corporation

Front 59

Deriviate Action (equity)

Back 59

If managment or a third party has abridged a legal duty owed to the corporation and the corporation fails to enforce its cause of action, a sharedholder may bring the cause of action in the name of the corporation asserting the right of the corporation against the defendant

Front 60

Conditions precedent to bringing a dervative action

Back 60

1) shareholder plaintiff must first demonstrate that he has exhaused his remedies within the corporate structure
1) demand on diretors

2) the Ownership Rule/Standing to Sue - The right to bring a derivative suit is an action of the right of ownership and therefore the party must be an owner

3) post a bond - in order to preven the abuse of derivative suits

Front 61

Derivative action does not address liability rather it...

Back 61

is a lawsuit to bring a lawsuit. The shareholder in essence is bringing a lawsuit to force the corporation to bring a lawsuit to determine liability

Front 62

Director/Officer duty of Care

Back 62

Officer/directors owe a fiduciary duty to the corporation and must discharge their dutites with the same degree of diligence, care and skill with the ordinary prudent person would exercise in the management of his own affairs

Front 63

Liability (breach)

Back 63

Arrives only where there is no reasonable school of throught that supports the directors behavior

Front 64

Injury and causation

Back 64

The party alleging that the director breached his duty of care to the corporation bears the burden of proving both the breach and that damages were caused proximately thereby

Front 65

Defenses

Back 65

1) The business judgement rule
2) reasonable reliance on expert advise
3) good faith reliance on management
4) absence from meeting at which misconduct occurred
5) just because the corporation incurs a loss does not mean the directors will be liable

Front 66

Duty of loyality (conflict of interest)

Back 66

Officers and directors are held to a fiduciary duty of loyality in all of their dealings with the corporation and that duty being to promote the interest of the corporation without regard for personal gain

Front 67

When does conflict of interst usually arise?

Back 67

Whenever a corporation contracts directly with one of its officers,. directors, or with a company in which such person has a financial interest

Front 68

Interested Director Transaction

Back 68

Where director sells or buys property services to or from the corporation

1) c/o - auto voidable

2) modern law - vodiable by corporation only (fraud or bad faith

3) MBCA the transaction is not voidable if
a) directors interest was disclosed, approved by majority of disinterested directors

b) disclosed and approved by majority of shareholders

c) the transaction is fair and reasonable to the corporation
b)

Front 69

Remedy

Back 69

Recision and measure of damages in amount of unfair profit made on the transaction

Front 70

Interlocking Directors

Back 70

Same person is director of two contracting corporations (look for full disclosure)

Front 71

Corporate Opportunity Doctrine

Back 71

The duty of loyality bars the dirctor or officer from making any profit in violation of the fiduciary duty to the corporation (first right of refusal)

Front 72

Inside Trading

Back 72

Insider (director, officer, or controlling shareholder) who trades on the basis of affirmative misrepresnetation (lies or half truth) made to a trading partner will be liable for common law fraud

Front 73

What is the Insider's Duty to disclose to shareholders?

Back 73

At common law = n oduty

Modern Law - Special Facts Doctrine (misrepresentation theory)

Front 74

Specific Facts Doctrine

Back 74

This doctrine was developed to protect an injured shareholder if:
a) sharedholer traded with an officer, director, or insider

b)The officer, director or insider traded on the basis of special information or special facts and failed to disclose such information to the shareholder

c) Privity existed between the insider and the shareholder re face to fact transactions

d) Individual was a sellter, buyers not protected

e) Seller had to be an existing shareholder

Front 75

10b-5

Back 75

Unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or the mails, to employ any fraudulent or manipulative devises in connection with the purchase or sale of securities elements:
1) Jurisdiction
2) Omission
3) Material
4) Scienter
5) Standing
6) Reliance
7) Privity
8) Remedies

Front 76

Jurisdiction

Back 76

Interstate commerce/mail national stock exchange

Front 77

Omission/misstatement

Back 77

Need not constitute common law fraud

Front 78

Material

Back 78

Reasonable investor test

Front 79

Scienter

Back 79

Corporation reckless disregard for the applicable rules and regulations. Specific intent to breach law not required

Front 80

Standing requirment

Back 80

Board definition of purchase/seller include, SEC, Corporate-Issuer
a) Sale includes, mergers, forced sales
b) exceptions to rule- derivative suits, injunctive relief sought

Front 81

Reliance

Back 81

Presumption if material (not necessary for an omission)
a) if affirmation misrepresentation involved the plaintiff must prove reliance

Front 82

Privity

Back 82

Not required

Front 83

Remedies

Back 83

Injunction/rescission/constructive trust / out of pocket damages

Front 84

Affirmative mispresentation

Back 84

Any person may be sued

Front 85

Omission -person must have a duty to disclose the information

Back 85

a) no matter who the defendant is or in what capacity he is sued the defendant must have a duty
b) the defendant must owe the duty to the corporation
c) Insiders (agent of the corporation who has access to material nonpublic information)

Front 86

Tipper (Insider)

Back 86

1) key is whether insider is exploiting information for personal gain (look for a direct/indirect benefit)

2) Was tip made for any improper purpose?

Front 87

Tippee (Non-insider)

Back 87

1) Liability will result only if inside breached a fiduciary duty to the corporation and the tippee knew the insider breached a fiduciary duty

Front 88

Aider/Abettor

Back 88

Section 10B of the Securities and Exchange Act of 1934 does not provide for private aiding and abetting suits

Front 89

Section 16b

Back 89

Profits realized in connection with the purchase and sale within 6 months of equity securities listed on a national stock exchange by an officer/director/or holders of more than 10% stock of the corporation are recoverable by the corporation

Front 90

Section 16b Elements

Back 90

1) Jurisdiction
2) statutory Insider
3) Short Swing Profits
4) Was it a purchase or sale
5) Recovery
6) No defense available - strict liability

Front 91

Jurisdiction

Back 91

Requires that the corporation be listed on National Exchange or have $10 million in assets and at least 500 sharedholders. Periodic reports must be filled

Front 92

Statutory Insider

Back 92

1) Officer/Directo who holds position at time of either purchase or sale

2) Holders of more than 10% at time of both purchase and sale. Only purchases are 10% are counted

Front 93

Short swing profit

Back 93

Match lowest purchase price minus highest sale price times number of shares and only the gains are counted. Must take place within a period of less than 6 months

Front 94

Was it a purchase or sale

Back 94

Any acquisition or disposition of stock, example merger gift is not a sale

Front 95

Section 14

Back 95

Section 14 - Prevents abuses in proxy solicitation

Front 96

Section 14 Elements

Back 96

1) Jursidiction
2) Omission/misstatement
3) material
4) liability
5) reliance
6) remedy

Front 97

Jurisdiction

Back 97

Same as 16. Any proxy solicitation be accomplished by proxy statement and filed with the SEC

Front 98

Omission/Misstatement

Back 98

Of a writing or a continous plan leading to or preparing for solicitation

Front 99

Material

Back 99

Would omitted fact have any actual significance in delberations of reasonable shareholder

Front 100

Liability

Back 100

Negligence may be sufficient

Front 101

Reliance

Back 101

Look to materiality

Front 102

Remedy

Back 102

Injunction/private suits

Front 103

Close Corporation

Back 103

A close corporatin include features of a corporation and a partership in that the owners manage the day to day operations (usually less than 30 shareholders). It has some restriction on the transferability of its stock, and does not make pubic offerings of it stock or other securities

Front 104

Close Corporation - liability

Back 104

Is placed on the shareholders who assume the roles of directos and officers. The concept is a delegation back to the shareholders who must therefore pay the price of liability as managers

Front 105

Shareholder Agreement

Back 105

If unanimously passed, allows control over some of the more detailed matters of corporate policy and management issues which were traditionally left to the Board of Directors

Front 106

Restriction on Transfer of Shares

Back 106

Restriction are premitted to control who can become a sharedholder:
1) restiction must be reasonably legitimate purpose

2) right of first refusal upheld if seller can get reasonable price

3) Corporation can refuse to transfer shares if shareholder violates valid restriction
4) Absolute restriction are void

5) Restriction must be conspicuous

Front 107

Authorization - shares

Back 107

Whatever shares are issued must be authorized by the articles or charter of the corporation. If all of the shares authorized have already been issued no further shares can be issued until there is an amendment to the articles

Front 108

Issuance - shares

Back 108

Process by which all or any part of the corporation's authorized shares are sold.

Front 109

Consideration Required to be Paid for Shares (Testable)

Back 109

Statutes in most jurisdictions regulate both the form (quality) and the amount (quantity) of consideration that the corporation must receive an issuance of its shares

Front 110

Bonus Stock

Back 110

No consideration Paid

Front 111

Discount stock

Back 111

Cash payment less than par stated value

Front 112

Watered stock

Back 112

Payment of property/services overvalued

Front 113

Valid consideratin

Back 113

Money paid, labor done, property acquired, secured promissory notes, cancellation of corporate debt

Front 114

Not valid consideration

Back 114

Pre-incorporation services
Future services
Unsecured promissory notes
goodwill

Front 115

Watered stock problem

Back 115

Stock is said to be watered when par value shares are shold for less than par and are therefore not fully paid. Look for situation where the corporation asks the shareholder for an amount which is less than par and the shareholder has paid the required amount

Front 116

par value shares

Back 116

Par shares must be sold at par or better in order to be fully paid except when the corporation cannot sell its shares at par and is a going concern whose capital is impaired

Front 117

Remedies

Back 117

1) corporation can cancel stock to extent watered
2) Issuance may be enjoined/specific performance
3) creditors
a) trust fund theory
b) misrepresentation theory
c) statutory obligation theory

Front 118

State Level Securities

Back 118

Blue sky law, license, regulations

Front 119

Federal Level

Back 119

Section 5 forbids use of interstate commerce to offer to sell a security unless a registration statement has been filed with the SEC

Front 120

Shares

Back 120

A share represents the stockholder's proprietary interest in the corporation which arises from acceptance by the corporation of the consideration offered by subscriber:

1) represents the right to receive dividens are declared by the board
2) the right to receive a portion of the corporate assets on liquidation
3) where voting shares are involved the right to vote

Front 121

Clases of shares

Back 121

Common shares - entitles owners thereof to pro rata dividions without priority or prefernce over any other stock and to voting rights and entitlement to share in assest distribution upon liquidation

Preferred stock - Stock with some sort of preference over other classes. Express provisions must claim the preference in the articles

Front 122

Dividends

Back 122

A dividend is any distribution of cash, property, or the corporation's own shares paid to shareholders on account of their stock ownership

Front 123

Is there a right to dividends distribution?

Back 123

There is no absolute right to dividend distribution even if legally available funds exits. Payment of dividends is a matter within the discretion of the board

Front 124

Remedies for unlawful dividends

Back 124

1) directors are personally liable (look for negligence)

2) sharedholders may have to return dividends

Front 125

Redemption

Back 125

Corporation acquires some or all of a class of outstanding shares by paying a stipulted redemption price which is generally in excess of par to the shareholders who must then surrender their certificate.

Front 126

Repurchase of shares

Back 126

(consideration inherent power) Corporation obligates itself to buy back shares at option of shareholder
1) corporation must be solvent
2) directors can cause repurchase to thwart a takeover if the corporate purspose is served as opposed to personal purpose
3) directors personally liable for improper repurchases (must act in good faith)
4) The souce of undsd for repurchase can only come from surplus
5)Minority shareholders cannot be exclused unless vaid business exists

Front 127

Caveat Rule 10b-5

Back 127

Where direcots cause the corporatioin to repurchase or redeem shares for the personal benefit of the directors the corporation as purchaser of the shares is deemed defrauded and is entitled to maintain a 10b-5 action against the parties to the fraud

Front 128

Merger

Back 128

One corporation is obsorbed into another. The survivor corporation issues shares of its stock or other securities to the transferor corporation's shareholders and they become shareholders of the survivor

Front 129

Consolidation

Back 129

Two or more existing corporations combine to form a wholly new corporation

Front 130

Shareholder ratification

Back 130

Requires 2/3 of the outstanding shares or a majoirty of the outstanding shares

Front 131

Effect of merger

Back 131

Transferor corporation ceases to exist and the survivor corporation succeeds by operation of law to all the rights, assets, and liabilities of the transferor

Front 132

Takeover

Back 132

1) requires purchase of outstanding shares (controlling)
2) no shareholder approval required unless buyer seeks amendment to articles
3) no appraisal rights attach

Front 133

Tender Offer

Back 133

A public offer (of cash or securities) to a corporation shareholders to buy shares at a special premium price over market value

Front 134

Dissolution

Back 134

Termination of the corporate existence as legal entity

Voluntary dissolution - can be brought by the incorporators prior to issuance by the shareholders or by corporate action

Front 135

Involuntary Dissolution

Back 135

Where a coroporation has exceeded or abused the authority conferred by its certificate of incorporation

Front 136

Liquidation

Back 136

(winding up the corporate affairs)

Liquidation is the process of winding up corporate affairs, and then distrubuting the remainder to the shareholders

Front 137

Amendment of the Articles of Incorporation

Back 137

Amendement of the corporate articles may result in a substantial change ( material) or impair the rights of the shareholders
1) board approval
2) notice to shareholders
3) shareholder approval
4) Amendment Sec of State
5) Conflict articles control over bylaws