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106 Cards in this Set

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Legal entity distinct from owners. There is limited liability for the owners, directors, and officers.

Free transferability of ownership. May exist perpetually.
Taxation of Corporation
C-Corp: Must pay tax on any profits, and shareholders not taxed until profits are distributed (double taxation).

S-Corps: Not subject to the double taxation - the profits and losses flow direction to the owners. (Limited entities, though).
Constitutional Characteristics of a Corporation
Entitled to due process and equal protection.

Can raise attorney-client privilege, but not privilege against self-incrimination.

Corporation is not a citizen. Domicile is state of incorporation. Residence is state of incorporation and where it is doing (or qualified to do) business.

Federal Diversity Jurisdiction = state of incorporation and principle place of business.
Principle Place of Business Tests
(1) Corporate Nerve Center (Location of Executive Offices)
(2) Corporate Operations (Location of Major Business Activity)
Articles of Incorporation Requirements
Must set out: (1) Name of corporation, (2) Number of shares authorized to issue, (3) Street address of corporation's initial registered office and name of initial registered agent, and (4) Name and address of each incorporator.
Optional Provisions in Articles of Incorporation
(1) Business Purposes
(2) Charitable Donations
(3) Loans
(4) Initial Directors
Name of Corporation
Must include "corporation," "incorporated," "limited," or something equivalent, and must not be similar to another business's name.
Scope of Business Purposes
The RMBCA presumes that corporations are formed for any lawful business purpose unless the articles otherwise specify.

If they specify business purposes, and act outside the scope, they are said to be acting "ultra vires" and shareholders (and corporation itself) can sue to enjoin. The state can sue to have it dissolved.
Corporate Existence
Begins upon filing with the state. After filed, the original directors (or the incorporators if no initial directors specified) will hold an organizational meeting to adopt bylaws, elect officers, and transact other business.
De Facto Corporation
Requirements to establish at common law:
(1) Statute for valid incorporation is available;
(2) Must have been a good faith ("colorable") attempt to comply with state law; and
(3) Must act like a corporation (exercise corporate privileges).

RMBCA recognizes this doctrine in some circumstances.

People who don't know there was no incorporation are not liabile - but the people who do, are.
Corporation by Estoppel
Persons who treat the entity as a corporation will be estopped from later claiming entity was not a corporation.
Piercing the Corporate Veil
As a general rule, a de jure corporation will be treated as a legal entity until sufficient reason to the contrary appears. Three situations where the veil is often pierced:
(1) When corporation formalities are ignored (a sham corporation);
(2) When corporation is inadequately capitalized at the outset (not enough money put in to offset possible liabilities); and
(3) To prevent fraud or an individual shareholder from using the corporation to avoid existing liabilities.
When Veil is Pierced, Who is Liable?
Normally only those active in management or operation of the business are held personally liable. When shareholders are liable, it's joint and several liability.
Who May Pierce the Corporate Veil?
Creditors and shareholders (though rare).

Tort victims are often successful plaintiffs to pierce the veil because generally they are not involved with the corporation in a transactional sense.
Corporate Securities
Debt Security: Creditor-debtor relationship with corporation. No ownership interest.

Equity Security: Instrument representing investment with corporation where holder because part owner (shares).

Debenture: Unsecured debt security.
Classes of Shares
If shares are divided into classes, the articles must:
(1) set number of shares of each class;
(2) set designation of each class; and
(3) describe rights, preferences, or limitations of each class (or provide that board of directors will do so prior to issuance).

May authorize shares that:
(1) have special, conditional, limited, or no right to vote;
(2) can be redeemed or converted;
(3) entitle shareholders to distributions; or
(4) have preference over other classes.
Offer to purchase shares from a corporation. Not a contract until accepted by the corporation.

RMBCA allows stock to be issued in exchange for any tangible or intangible property of benefit to the corporation (possibly limited from issuing in exchange for promissory notes or future services, though).
Amount of Consideration for Shares
Traditionally, couldn't issue shares for less than par value, but the RMBCA allows whatever the directors in good faith deem to be adequate.
Watered Stock
Under the traditional view, if shares are issued for less than par value, the original purchaser and authorizing directors are liable for the difference (or the "water"). Not an issue under the RMBCA.
Procure commitments for capital and other instrumentalities that will be used by the corporation after formed. They have a fiduciary duty to each other, and upon incorporation, to the corporation and its investors.
Promoter's Liabilities
One who profits on sale of property to the corporation may be liable for breach of fiduciary duty, unless full disclosure was made.

Always liable for fraud (and may be liable under the Securities Exchange Act.

If promoter enters into an agreement with a third party to benefit a planned, but currently unformed, corporation, he is personally liable. This liability continues after incorporation, even if the corporation adopts the contract, absent novation. If no novation, but corporation adopts the contract, promoter may have right of indemnity against corporation.
Shareholder Management Control
Common law: Shareholders have no right to control day-to-day management.

RMBCA: Shareholders may enter into agreements concerning the management of the corporation.

Shareholders have indirect control over the corporation through power to elect directors, amend bylaws, and approve fundamental changes to the corporation.
Shareholder Meetings
Corporations must hold annual meetings. If the meeting is not held within 6 months of the end of the corporation's fiscal year or 15 months after the last meeting, a court can compel meeting.
Special Shareholder Meetings
Special meetings may be called by directors or at least 10% of eligible voters.
Location of Shareholder Meetings
Meetings may be held anywhere (fixed or stated in the bylaws). If no place is set, it is deemed to be held at the corporation's principle office.
Notice of Shareholder Meeting
Must be sent to shareholders entitled to vote at the meeting. Must be delivered not more than 60 days prior and not less than 10 days prior. Must state place, day, and time of meeting. If it's a special meeting, must state the purpose.
Waiver of Notice Defects
Shareholder is deemed to waive defects in notice if:
(1) Waives in signed writing, or
(2) Attends meeting and doesn't object to notice.

If shareholder doesn't waive, and the notice is improper, action at the meeting may be set aside.
Who is Entitled to Notice of Shareholder Meeting?
Corporation's bylaws my fix record date to determine which shareholders are entitled to meeting notice or to vote. Can't be more than 70 days before the meeting. If not set, it will be one day before sending the first notice of meeting to shareholders. After the record date, the corporation must prepare an alphabetical list of shareholders, addresses, and number of shares held, and it must be made available for inspection two business days after notice of meeting was given.
Shareholder Voting
Unless otherwise provided, each share gets one vote.

A shareholder may vote his shares in person or by proxy.

Quorum must attend the meeting before a vote can validly take place.
Shareholder Proxy
A proxy can be appointed in writing by the shareholder or his attorney in fact. Proxy is valid for only 11 months unless otherwise provided, and is generally revocable. Only irrevocable if stated as such and coupled with an interest.
Shareholder Voting Quorum
Generally requires majority unless the articles otherwise provide. Action is approved if it received more votes in favor than opposing (unless articles otherwise provide).

If a shareholder leaves after meeting begins, will not destroy quorum, even if fewer than quorum remain.

Directors are elected by a plurality.
Cumulative Voting
Each share gets votes equal to number of vacancies, and requires notice.
Who May Vote on Amendments?
If the amendment to the articles only affects one class, that class generally has the right to vote, even if not otherwise permitted to vote. Class voting should be used whether proposed amendment is adverse or advantageous to class.
Shareholder Agreements
(1) Voting Trust
(2) Voting Agreement
(3) Shareholder Management Agreement
Voting Trust
Created by (1) entering into a signed agreement setting forth the trust's terms, and (2) transferring legal ownership of shares to the trustee. Not valid more than 10 years unless extended by parties, and a copy of the agreement must be given to the corporation.
Voting Agreement
Written and signed, but no transfer of ownership. No trustee, and doesn't have to be shared with the corporation. No time limit. Specifically enforceable.
Shareholder Management Agreement
Agreement between shareholders regarding almost any aspect of exercise of corporate powers or management. To be valid, must either (1) be set forth in the articles/bylaws and approved by all shareholders at the time of agreement, or (2) be set forth in written agreement by all shareholders at the time of agreement and filed with the corporation.

Valid for 10 years unless specified.

May only be amended by all shareholders at time of agreement unless specified otherwise.

One who purchases stock without knowledge of the agreement may rescind the purchase.
Permissible Restrictions on Transfer of Shares
(1) Must first offer to the corporation;
(2) Corporation or other specified people must acquire restricted shares;
(3) Requires corporation or other designated people to approve transfer of restricted shares (if requirement is not manifestly unreasonable); or
(4) prohibit transfer to designated people/classes (unless manifestly unreasonable).

Enforceable only if (1) restriction noted conspicuously on the certificate (or information statement, if uncertificated) or (2) holder or transferee had knowledge of restriction.
Shareholder Rights
Common Law: Right to inspect corporate books and records upon request if there is a proper purpose to do so. Some states limit this to shareholders with greater than 5% of shares of those who've held shares for at least 6 months.

RMBCA provides another exception. Shareholder may inspect the following records regardless of purpose:
(1) Articles and bylaws;
(2) Board resolutions regarding classification of shares;
(3) Shareholder meeting minutes from the past 3 years;
(4) Communications sent by corporation to shareholders over past 3 years;
(5) List of names and business addresses of corporation's current directors and officers; and
(6) Copy of corporation's most recent annual report.
Preemptive Right
Common law granted shareholders the right to purchase some of any new shares issued to maintain their proportional voting strength. Under the RMBCA, there is no right unless the articles so provide.
Waiver and Limitations of Preemptive Right
Shareholder may waive preemptive right.

Such right does not apply to:
(1) Shares issued as compensation to employees, directors, etc. of the corporation;
(2) Shares authorized in the articles issued within 6 months of incorporation;
(3) Shares issued for consideration other than money (property or services); or
(4) Shares without general voting rights but having distribution preference.

Sales for less than the price offered to shareholders within one year of offer subject to preemptive rights.
Shareholder Suits - Direct Actions
Breach of fiduciary duty owed to shareholder by officer/director. In direct action, any recovery is for benefit of individual shareholder, or if class action, benefit of class.
Shareholder Suits - Derivative Actions
Shareholders enforcing rights of others (the corporation). Recovery generally goes to the corporation, not the shareholder. Must have been a shareholder at the time of the wrong, or must become shareholder through transfer by operation of law (by will) from one who was a shareholder then. Shareholder must first make a written demand to the corporation to take action.

Derivative proceeding can't start until 90 days after the demand was made unless (1) the shareholder was notified that the corporation rejected the demand, or (2) irreparable injury would be caused to the corporation by waiting 90 days.

Corporation is named as a defendant.
Can be dividends or liquidating distributions. At least one class of stock must have right to receive corporation's net assets on dissolution.
When Distributions Not Permitted
Not permitted if, after giving effect, either:
(1) Corporation wouldn't be able to pay its debts as they become due in the usual course of business (insolvent), or
(2) Corporation's total assets would be less than the sum of total liabilities plus amount needed if corporation were to be dissolved at the time of distribution, to satisfy the preferential rights on dissolution of shareholders whose rights superior to those receiving distributions.

Share dividends are not under these rules.
Preferred Shares and Distributions
Usually entitled to a fixed amount of money each year before distributions made to non-preferred.

Cumulative Preferred Shares: If dividend not declared in a particular year, right to receive preference accumulates and must be paid before dividends paid.
Do Shareholders have a right to dividends?
Generally, no. But once once is legally declared, shareholders are treated as creditors of the corporation.
Director Liability and Distributions
Not liable for distributions approved in good faith based on financial statements prepared reasonably, or relying on information from officers, employees, accountants, attorneys, etc. Directors held liable for unlawful distribution entitled to contribution by (1) every other director who could be held liable, or (2) each shareholder for the amount she accepted knowing distribution was improper.
Shareholder Liabilities
Generally have no fiduciary duty to corporation or fellow shareholders, except for shareholder liability for: (1) unpaid stock, (2) a pierced veil, and (3) absence of de facto corporation when shareholder knew no incorporation.

Liability possible pursuant to shareholder agreement.

Shareholders in a close corporation (owned by few people) owe duty of loyalty and utmost good faith owed by partners.

Controlling shareholder must refrain from using control to obtain special advantage or to cause corporation to take action that unfairly prejudices minority shareholders.

Shareholders who illegally sell corporate assets for own benefit will be forced to disgorge their profit.

May be liable for insider trading (controlling shareholders).
Have general responsibilities of management of corporation's business. No qualifications unless articles provide otherwise. Elected at first annual shareholder meeting and at each meeting thereafter unless terms are staggered.

The number of directors is set by articles or bylaws. Terms expire at the next annual shareholder meeting unless staggered. Stays in office until successor is elected and qualified. May be removed with or without cause by shareholders.
Directors Meeting
Regular meetings may be held without notice, but special meetings require 2 days' notice. Director may waive notice. Quorum is usually a majority, but can be set otherwise by the articles or bylaws. Can be no fewer than 1/3 of board members. Quorum must be present at the time of voting. Actions approved by majority vote of those present.
Director Liabilities
Articles can limit or eliminate directors' personal liability, except for (1) amount of financial benefit to director not allowed, (2) intentionally inflicted harm on corporation and/or shareholders, (3) unlawful corporate distributions, or (4) intentional violation of criminal law.
Director Duties
Duty of Care: Must discharge duties in good faith, with ordinary care, and in a manner directors reasonably believe to be in the corporation's best interests. Person challenging the action has the burden of proof.

Duty of Loyalty: Not permitted to profit at corporation's expense. When conflict of interest arises, action won't be enjoined if (1) majority of directors without conflicting interests (at least 2) approved the transaction after full disclosure made, (2) shareholders (majority in same manner as 1) approve, or (3) transaction is judged to be fair to the corporation.

Possible remedies: injunction, setting aside transaction, damages, etc.
Director Compensation
The board sets directors' compensation. Unreasonable compensation will breach fiduciary duty.
Not required by RMBCA. Existence and duties are governed by bylaws.

Actual Authority: President has implied authority to enter into contracts and act on behalf of the corporation. Vice-President has implied authority to act when President is unavailable. Secretary has implied authority to keep corporate records. Treasurer has implied authority to keep and receive corporate funds.

Standard of Conduct: Must carry out in good faith with ordinary care, and in the best interests of the corporation.

May resign at any time, and corporation may remove with or without cause at any time.
Mandatory Indemnification
Unless limited by the articles, a corporation must indemnify a director or officer who prevailed in defending the proceeding against the officer or director for reasonable expenses, including attorneys' fees.
Discretionary Indemnification
Corporation may indemnify a director for reasonable expenses incurred in unsuccessfully defending a suit brought against the director on account of the director's position if:
(1) the director acted in good faith; and
(2) believed that her conduct was:
(a) in the best interests of the corporation (when the conduct at issue was within the director's official capacity);
(b) not opposed to the best interests of the corporation (when the conduct at issue was NOT within the director's official capacity); or
(c) not unlawful (in criminal proceedings).
Types of Fundamental Corporate Changes
(1) Most amendments of the articles
(2) Mergers
(3) Share exchanges
(4) Dispositions of substantially all property outside the usual and regular course of business
(5) Dissolution
General Procedure for Fundamental Changes
(1) A majority of the board of directors adopts a resolution recommending the fundamental change;
(2) Notice of the proposed change is sent to all shareholders (whether or not entitled to vote). Notice must (a) describe the change and inform the shareholders that a vote will be taken on the matter at a shareholders' meeting, and (b) be given not less than 10 or more than 60 days before the meeting;
(3) The change is 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; and
(4) The change is formalized in articles (e.g., articles of amendment, articles of merger, etc), which are filed with the state.
Amendments that Board Can Make Without Shareholder Approval
(1) To extend the corporation's duration if the corporation was formed when the law required a limited duration;
(2) To delete the names and/or addresses of the initial directors or registered agent or office;
(3) To change the authorized number of shares to implement a share split, as long as there is only one class of shares outstanding;
(4) To change the company name by substituting a different word or abbreviation than the one currently indicating the corporation's corporate status or changing a geographical attribute; and
(5) Any other change permitted by the RMBCA without shareholder approval.
Amendments Giving Rise to Dissenters' Rights
(1) Change the aggregate number of authorized shares of the class;
(2) Change shares of the class into a different number of shares (e.g., a stock split);
(3) Exchange or reclassify shares of the class into shares of another class or of another class into shares of this class;
(4) Change the rights or preferences of the shares of the class, including limiting or denying existing preemptive rights;
(5) Change the rights of another class, or create another class, so that the changed or new class has rights or preferences equal or superior to rights and preferences of this class; or
(6) Cancel rights to distributions that have accumulated, but have not yet been declared for, the shares of the class.
Approval by shareholders of the surviving corporation on a plan of merger is not required if all the following conditions exist:
(1) The articles of incorporation of the surviving corporation will not differ from the articles before the merger;
(2) Each shareholder of the survivor whose shares were outstanding immediately prior to the effective date of the merger will hold the same number of share, with identical preferences, limitations, and rights; and
(3) The voting power of the shares issued as a result of the merger will comprise more than 20% of the voting power of the shares of the surviving corporation that were outstanding immediately prior to the merger.
Short Form Merger of Subsidiary
A 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. This is known as "short form merger." The parent must mail a copy of the plan of merger to each shareholder of the subsidiary who does not waive the mailing requirement in writing. Articles of merger may not be delivered to the state for filing until at least 30 days after the plan was mailed to the shareholders.
Share Exchange
In a share exchange, only the shareholders of the corporation whose shares will be acquired in the share exchange need approve; a share exchange is NOT a fundamental corporate change for the acquiring corporation. Notice requirements are the same as for amendment of the articles.
Effect of Merger
Where there is a merger, every other corporation that is a party to the merger merges into the surviving corporation, and the separate existence of every corporation except the survivor ends. All property owned by the separate entities, and all obligations of the separate entities, become the property and obligations of the surviving corporation. A proceeding pending against a party to the merger may continue as if the merger did not occur, or the surviving corporation may be substituted.
Effect of Share Exchange
When a share exchange takes effect, the shares of each acquired corporation are exchanged as provided in the plan, and the former holders of the shares are entitled only to the exchange rights provided in the plan. The corporations remain separate.
Disposition of Property Outside the Usual Course of Business
A sale, lease, exchange, or other disposition of all or substantially all of a corporation's property outside of the usual and regular course of business is a fundamental corporate change for the corporation disposing of the property. Thus, the corporation disposing of the property must follow the fundamental change procedure. Note that the corporation purchasing the property is not undergoing a fundamental corporate change, and so approval from that corporation's shareholders is not necessary.
Dissenting Shareholders' Appraisal Remedy
Shareholders who are dissatisfied with the terms of a fundamental corporate change usually are permitted to compel the corporation to buy their shares at a fair value following a special statutory procedure. In most cases, absent fraud, misrepresentation, or improper procedure, a shareholder entitled to appraisal rights may not challenge a completed corporate action for which appraisal rights are available.
Who May Dissent?
Merger: Any shareholder entitled to vote on a plan of merger and shareholders of the subsidiary in a short form merger have the right to dissent.

Share Exchange: Shareholders of the corporation whose shares are being acquired in a share exchange have the right to dissent.

Disposition of Property: A shareholder who is entitled to vote on a disposition is entitled to dissent. Doesn't include a sale pursuant to court order, or a cash sale pursuant to a plan by which the net sale proceeds will be distributed to the shareholders within one year of the date of sale.

Amendment of Articles: Shareholder has a right to dissent from an amendment of the articles that materially and adversely affects the shareholder's rights, unless there is a court order for reorganization.
Procedure for Dissenting
(1) Corporation must give shareholders notice if the proposed action will create dissenters' rights.
(2) Shareholder must give notice of intent to demand payment if the action is taken (prior to the vote being taken).
(3) Corporation must give dissenters notice within 10 days of the vote (if the action is approved) telling shareholders when and where they must submit their shares, and other terms of the repurchase.
(4) Shareholders must demand payment.
(5) Corporation must pay fair value of the shares, plus accrued interest.
(6) If the shareholder is dissatisfied with the corporation's determination of value, must send her own estimate of value and demand the different within 30 days of payment.
(7) If corporation doesn't want to pay what the shareholder demanded, corporation must file an action in court within 60 days of the demand, otherwise must pay the difference.
Tender Offer
An offer to shareholders (offerees) of a corporation (target) asking them to tender their shares in exchange for cash or securities. Usually made by another corporation (bidder), but the bidder may also be an individual or a group. Primary method of gaining control over a target corporation. Regulated by the Williams Act.
Elements of a Tender Offer
(1) A widespread solicitation of public shareholders;
(2) For a substantial percentage of the target's stock;
(3) At a premium price (above the prevailing market price);
(4) Contingent on the tender of a fixed number of shares.
Regulation and Terms of Tender Offer
(1) Must be held open for at least 20 days;
(2) Must be open to all security holders of the class of securities subject to the tender offer;
(3) Shareholders must be permitted to withdraw tendered shares while the offer remains open;
(4) If offer is oversubscribed, the bidder must purchase on a pro rata basis from among the shares deposited during the first 10 days or such other period as the bidder designates; and
(5) If the tender offer price is increased, the higher price must be paid to ALL tendering shareholders.
Voluntary Dissolution
Dissolution without judicial proceedings may be accomplished in the following ways:
(1) Dissolution by Incorporators or Initial Directors if shares haven't been issued or business hasn't yet commenced.
(2) May dissolve voluntarily by an act of the corporation (standard procedure for fundamental corporate change is followed).
Effect of Dissolution
Corporation that has been 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. Permissible activities: collection of assets, disposal of property, discharging liabilities, and distributing property among shareholders.
Known Claims Against Dissolved Corporation
To bar known claims, corporation must notify known claimants in writing of the dissolution. Must describe the procedure for asserting a claim, and set a deadline not less than 120 days from the date of notice. A claim is barred if a claimant who receives notice fails to deliver the claim by the deadline, or if a claimant whose claim has been rejected does not commence a proceeding to enforce the claim within 90 days of the rejection.
Unknown Claims Against Dissolved Corporation
To bar claims not known to the corporation, it must publish notice of its dissolution in a newspaper in the county where the corporation's principal place of business is located. The notice must describe the procedure for asserting a claim and state that a claim will be barred unless a proceeding to enforce it is commenced within five years after notice is published.
Revocation of Voluntary Dissolution
A corporation may revoke a voluntary dissolution by using the same procedure that was used to approve the dissolution. The revocation relates back to and takes effect as of the effective date of the dissolution, so that the corporation may resume carrying on its business as if there had never been a dissolution.
Grounds for Administrative Dissolution
State may bring an action to dissolve a corporation for any of the following reasons:
(1) Failure to pay any fees or penalties imposed by law within 60 days after their due date;
(2) Failure to deliver the annual report to the state within 60 days after it is due;
(3) Failure to maintain a registered agent in the state for 60 days or more;
(4) Failure to notify the state of a change in registered agent within 60 days; or
(5) Expiration of the period of corporate duration set forth in the articles of incorporation.
Procedure of Administrative Dissolution
If grounds for dissolution exist, the state must serve the corporation with written notice. If the corporation does not correct the grounds for dissolution or show that the grounds do not exist within 60 days after service of notice, the state effectuates the dissolution by signing a certificate of dissolution.
Reinstatement After Administrative Dissolution
A corporation that is administratively dissolved may apply for reinstatement within two years after the effective date of dissolution. The application must state that the grounds for dissolution did not exist or that they have been eliminated. Reinstatement relates back to the date of dissolution, and the corporation may resume carrying on business as if the dissolution had never occurred.
Judicial Dissolution
Attorney general may seek on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority.

Shareholders may seek on any of the following grounds:
(1) Directors are deadlocked in the management of corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock;
(2) The directors have acted or will act in a manner that is illegal, oppressive, or fraudulent;
(3) The shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least 2 consecutive annual meeting dates; or
(4) Corporate assets are being wasted or misapplied to non-corporate purposes.

Creditors may seek if (1) creditor's claim has been reduced to judgment, execution of judgment has been returned unsatisfied, and the corporation is insolvent; or (2) corporation has admitted in writing that the creditor's claim is due and owing and the corporation is insolvent.
Limited Liability Company
Entity eligible to be taxed like a partnership while offering its owners (called "members") the limited liability that shareholders of a corporation enjoy. Unless an LLC requests to be taxed as a corporation, will receive partnership tax treatment (i.e., LLC will not be treated as a taxable entity - profits and losses flow to the owners).
Formation of an Limited Liability Company
Formed by filing articles of incorporation with the secretary of state. Must include:
(1) statement that the entity is an LLC;
(2) name of the LLC, which must include indication that it is an LLC;
(3) Street address of the LLC's registered office and name of its registered agent; and
(4) names of all the members.
Other Provisions Regarding Limited Liability Companies
Members are not personally liable for the LLC's obligations.

Management is presumed to be by all members - other arrangements can be made, but must be specified in the articles. Majority is required to approve most decisions, and each member is an agent of the LLC.

An assignment of a member's interest in an LLC transfers only the rights to receive profits and losses, not management rights.

One can become a member, but only with the consent of all members.

Dissociation of an LLC member generally causes dissolution of the LLC.

Profits and losses are allocated on the basis of contributions.
Professional Corporations
Generally treated like a corporation, but limit share ownership to licensed professionals and make it clear that a professional practicing in the corporation will still be personally liable for his own malpractice despite the corporate form.
Formation of a Professional Corporation
A person or group of persons licensed to practice a profession may elect to practice as a professional corporation. Articles of incorporation are basically the same as in a regular corporation and filed in the same way, but must state that it is a professional corporation and that its purpose is to render professional services.

The name must contain one of the following: "professional corporation," "professional association," "service corporation," or the abbreviation "P.C.," "P.A.," or "S.C." The name must also conform with any rule of the licensing authority that has jurisdiction over the corporation's profession.
Professions Applicable to Professional Corporations
Generally includes:
(1) Architects,
(2) Attorneys,
(3) CPAs,
(4) Engineers,
(5) Medical Professionals (doctors, dentists, pharmacists, etc.), and
(6) Psychologists.
Operation of Professional Corporation
Generally, a professional corporation may only practice one profession, unless state law allows otherwise.

Limited to licensed personnel (but may employ those who aren't licensed for other purposes).

At least half of the board and all of the officers of a professional corporation (except the secretary and treasurer) must be licensed to practice the profession for which the corporation is organized.

Shareholders and proxies must also be licensed professionals.

Shares must conspicuously note that they are shares of a professional corporation and that their transferability is restricted.
State's Power to Exclude Foreign Corporations
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.
Admission of Foreign Corporation
May not transact business within a state until it has obtained a "certificate of authority" from the secretary of state. Application must include the same basic information as is contained in the articles of a domestic corporation. On finding compliance with law and payment of fees, the secretary will issue a certificate of authority.
Effect of Transacting Business Without a Certificate
Cannot bring suit in state courts, but may defend suits.

Doesn't typically affect the validity of any contract or corporate act, though a minority of jurisdictions render contracts of an unauthorized foreign corporation void or voidable.
Rule 10b-5 (Securities Regulation)
Unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or the mails, or of any facility of any national securities exchange to:
(1) Employ any device, scheme, or artifice to defraud;
(2) Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) Engage in any act, practice, or course of business that operates or would operate as a fraud or a deceit upon any person, in connection with the purchase or sale of any security.

Violation of the rule can result in a private suit for damages, an SEC suit for injunctive relief, or criminal prosecution.
Elements of Violation of Rule 10b-5
(1) Fraudulent Conduct (Materiality and Scienter);
(2) In Connection With the Purchase or Sale of a Security by Plaintiff;
(3) In Interstate Commerce;
(4) Reliance; and
(5) Damages.
Insider Trading
Breaches a duty of trust and confidence owed to:
(1) The issuer;
(2) Shareholders of the issuer; or
(3) In the case of misappropriators, another person who is the source of the material nonpublic information.
Who May Be Liable for Insider Trading?
(1) "Insiders" - Anyone who breaches a duty not to use inside information for personal benefit.
(2) Tippers and Tippees - Tipper liable if tip was made for any improper purpose. Tippee liable if tipper breached a duty and tippee KNEW that he was doing so.
(3) Misappropriators - Persons who owe a duty of trust and confidence to the source of information.
Nonexclusive list:
(1) Person agrees to maintain information in confidence;
(2) Person communicating the information and the person with whom it is communicated have a history of sharing confidences so that the recipient of the information should know that the person communicating the information expects the recipient to maintain confidentiality; or
(3) Person receives information from a spouse, child, parent, or sibling (unless recipient can prove that he had no reason to know that the information was confidential).
Remedies for Insider Trading
Individual plaintiffs may sue for damages (based on difference between price paid, or received, by plaintiff and average share price in the 90-day period after corrective information is disseminated) or rescission (in lieu of damages). Punitive damages are not available under this rule.
Section 16(b) of the Securities Exchange Act
Strict Liability!

(1) Purchase and Sale or Sale and Purchase Within 6 Months
(2) Equity Security (any security other than a pure debt instrument)
(3) Officer, Director, or More Than 10% Shareholder

Profit recoverable, known as "short swing profits," includes not only traditional profits, but also losses avoided. Use of inside information is not material to this recovery.
Sarbanes-Oxley Act of 2002
Applies primarily to companies who must register with the SEC (i.e., those whose shares are traded nationally or that have at least 500 record shareholders and more than $10 million in assets).
Corporate Responsibility under Sarbanes-Oxley
Each company must establish an audit committee composed of board members to oversee work done by a registered public accounting firm.

Directs the SEC to adopt rules requiring companies filing reports to have their CEO, CFO, or similar person certify in each report, among other things, that:
(1) The officer has reviewed the report;
(2) Based on the officer's knowledge, the report is true and does not contain any material omissions;
(3) The report fairly presents the financial position of the company; and
(4) The signing officer is responsible for establishing internal controls, has designed such controls to ensure that material information is made known to the officer, and has evaluated the controls within 90 days prior to the report.

If a company is required to restate financial reports because of misconduct with respect to the reports, the CEO and CFO must reimburse the company for any bonus or other incentive-based compensation received by them during the 12 -month period after the inaccurate reports were filed with the SEC or made public.
Criminal Penalties for Destruction, Alteration, Etc. Under Sarbanes-Oxley
Punishable by fine and imprisonment of up to 20 years for anyone to knowingly alter, destroy, mutilate, falsify, etc, a document or record with intent to impede a federal investigation.
Criminal Penalty for Destruction of Corporate Audit Records (Sarbanes-Oxley)
Punishable by fine and up to 10 years imprisonment to willfully fail to keep all work-papers related to the audit done (by an accountant of a registered company) for at least 5 years.
Statute of Limitations for Fraud (Sarbanes-Oxley)
For private cases for securities fraud is the later of two years after discovery of the facts giving rise to the cause of action or five years after the action accrued.
Whistleblower Protection (Sarbanes-Oxley)
Creates a statutory cause of action for persons who are discharged because they lawfully provided information to their supervisors or the federal government regarding any conduct that they reasonably believed to be in violation of the securities laws. Also protects employees who testify in, participate in, or file securities or antifraud proceedings. Remedies include reinstatement, back pay, attorneys' fees, and litigation costs. These protections also extend to contractors, subcontractors, and agents of the issuer.
Criminal Penalties for Defrauding Shareholders and the Public (Sarbanes-Oxley)
Securities fraud crimes punishable by a fine and imprisonment of up to 25 years.