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137 Cards in this Set

  • Front
  • Back
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
De Jure Incorporation
(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
Substantial Compliance
Substantial compliance with statutory requirement is sufficient for de jure status re completion of all mandatory conditions precedent
Who can be held liable if the corporation becomes insolvent
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
De Facto Incorporation
(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
Colorable Compliance
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
Good Faith
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
Testable Issue re: filing Articles of Incorporations
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.
Corporation by estoppel
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
Third Party - dealing with corporation (contract)
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)
Can Corporation defend itself on it own invalidity?
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
Consequences of a defective formation
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
Piercing the Corporate Veil
Shareholders may be subject to unlimited liabilities where corporate entity is case aside by a court of equity
Two factors are required to establish adequate grounds for disregarding the corporate veil
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
Enterprise liability theory
Affiliated corporations are considered fragments of one business enterprise where the subsidiary is wholly owned by the parent
Effect of piercing veil
majority - active shareholders liable

minority - all shareholders liable
Deep Rock Doctrine (insalvency re bankruptcy)
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
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
Fidicuary duty to other promoters
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
Fidicuiary duty to the corporation
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
Pre-Incorporation Transaction with Third Parties
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
Is the corporation automatically bound by a promoter's pre-incorporation?
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
Remedies of promoter
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
Pre-incorporation stock subscription
Offer from a potential shareholder to the corporation which was considered revocable at common law. Such subscription provides financial security to a new corporation
Remedies for corporation - pre-incorporation stock subscriptions
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
Defenses of shareholder
1) corporation become materially different
2) denied participation in management and organization as a subscriber

3) the sale was fraudulently induced
Post Incorporation subscriptions
Revocable contract prior to acceptance (CA irrovcable) betwen corporation and subscriber for issuance/purchase of shares
Coporate Adoption and Ratification
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
Remedies Promoter
1) may seek indemification

2) quasi contractual relief where the corporation retains the benefits
Powers of Corporation
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
Management and Control
The right to manage the property and affairs of the corporation is vested in the board of directors and not in its shareholders
Appointment of directors
1) Articles and election

2) Directors can appoint vacancies or call for a special election by the shareholer
Tenure of directors
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
Functioning of the Board
Corporate powers are generally exercised by or under the authority of hte board of directors meeting where there is a quorum present.
Quorum Requirement
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
Notice Requirement
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
Delegation of board authority and board functions
Decretionary powers - non delegable. The board is not permitted to delegate its policy making discretionary powers
Delegation to outside management
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
Compensation and reimbursement
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
Is a director who also serves as a officer or employee of the corporation entitled to compensation?
Doctrine of Waste
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
Director's right of inspection
1) unqualified right to inspect exists at any reasonable time

2) former director has only a qualified right (good cause)
Directo may be legitimate creditor of the corporation if following are present
1) debt liquidated - certain amount

2) debt unmatured - debt not yet due

3) debt uncontested
Indemnification of directors
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
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
Do officers receive compensation?
Officers are entitled to receive reasonable compensation for their services to the corporation
Shareholders Rights
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
Shareholder Votings Rights
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
Eligibiltity to vote
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.
Voting Trust
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
Pooling Agreement
Contract amoung shareholders whereby they agree ahead of time to votee their shares in a specified way for a specified period of time
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)
Shareholder meeting
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
Preemptive right
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
Duty of good faith
Corporation action caused by controlling shareholders requires good faith action and fairness in all business affairs and dealings
Sale of corporation
1) Majority has duty to exercise good faith and fairness and not seel control to someone who will loot the corporation
Resolution of disputes among shareholders
1) provisional directors appointed by court to break board deadlock

2) arbitration
Direct Action (by shareholder)
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
Deriviate Action (equity)
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
Conditions precedent to bringing a dervative action
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
Derivative action does not address liability rather it...
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
Director/Officer duty of Care
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
Liability (breach)
Arrives only where there is no reasonable school of throught that supports the directors behavior
Injury and causation
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
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
Duty of loyality (conflict of interest)
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
When does conflict of interst usually arise?
Whenever a corporation contracts directly with one of its officers,. directors, or with a company in which such person has a financial interest
Interested Director Transaction
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
Recision and measure of damages in amount of unfair profit made on the transaction
Interlocking Directors
Same person is director of two contracting corporations (look for full disclosure)
Corporate Opportunity Doctrine
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)
Inside Trading
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
What is the Insider's Duty to disclose to shareholders?
At common law = n oduty

Modern Law - Special Facts Doctrine (misrepresentation theory)
Specific Facts Doctrine
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
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
Interstate commerce/mail national stock exchange
Need not constitute common law fraud
Reasonable investor test
Corporation reckless disregard for the applicable rules and regulations. Specific intent to breach law not required
Standing requirment
Board definition of purchase/seller include, SEC, Corporate-Issuer
a) Sale includes, mergers, forced sales
b) exceptions to rule- derivative suits, injunctive relief sought
Presumption if material (not necessary for an omission)
a) if affirmation misrepresentation involved the plaintiff must prove reliance
Not required
Injunction/rescission/constructive trust / out of pocket damages
Affirmative mispresentation
Any person may be sued
Omission -person must have a duty to disclose the information
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)
Tipper (Insider)
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?
Tippee (Non-insider)
1) Liability will result only if inside breached a fiduciary duty to the corporation and the tippee knew the insider breached a fiduciary duty
Section 10B of the Securities and Exchange Act of 1934 does not provide for private aiding and abetting suits
Section 16b
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
Section 16b Elements
1) Jurisdiction
2) statutory Insider
3) Short Swing Profits
4) Was it a purchase or sale
5) Recovery
6) No defense available - strict liability
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
Statutory Insider
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
Short swing profit
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
Was it a purchase or sale
Any acquisition or disposition of stock, example merger gift is not a sale
Section 14
Section 14 - Prevents abuses in proxy solicitation
Section 14 Elements
1) Jursidiction
2) Omission/misstatement
3) material
4) liability
5) reliance
6) remedy
Same as 16. Any proxy solicitation be accomplished by proxy statement and filed with the SEC
Of a writing or a continous plan leading to or preparing for solicitation
Would omitted fact have any actual significance in delberations of reasonable shareholder
Negligence may be sufficient
Look to materiality
Injunction/private suits
Close Corporation
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
Close Corporation - liability
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
Shareholder Agreement
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
Restriction on Transfer of Shares
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
Authorization - shares
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
Issuance - shares
Process by which all or any part of the corporation's authorized shares are sold.
Consideration Required to be Paid for Shares (Testable)
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
Bonus Stock
No consideration Paid
Discount stock
Cash payment less than par stated value
Watered stock
Payment of property/services overvalued
Valid consideratin
Money paid, labor done, property acquired, secured promissory notes, cancellation of corporate debt
Not valid consideration
Pre-incorporation services
Future services
Unsecured promissory notes
Watered stock problem
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
par value shares
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
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
State Level Securities
Blue sky law, license, regulations
Federal Level
Section 5 forbids use of interstate commerce to offer to sell a security unless a registration statement has been filed with the SEC
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
Clases of shares
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
A dividend is any distribution of cash, property, or the corporation's own shares paid to shareholders on account of their stock ownership
Is there a right to dividends distribution?
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
Remedies for unlawful dividends
1) directors are personally liable (look for negligence)

2) sharedholders may have to return dividends
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.
Repurchase of shares
(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
Caveat Rule 10b-5
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
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
Two or more existing corporations combine to form a wholly new corporation
Shareholder ratification
Requires 2/3 of the outstanding shares or a majoirty of the outstanding shares
Effect of merger
Transferor corporation ceases to exist and the survivor corporation succeeds by operation of law to all the rights, assets, and liabilities of the transferor
1) requires purchase of outstanding shares (controlling)
2) no shareholder approval required unless buyer seeks amendment to articles
3) no appraisal rights attach
Tender Offer
A public offer (of cash or securities) to a corporation shareholders to buy shares at a special premium price over market value
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
Involuntary Dissolution
Where a coroporation has exceeded or abused the authority conferred by its certificate of incorporation
(winding up the corporate affairs)

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