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63 Cards in this Set
- Front
- Back
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Six Corporate Law Fact Patterns |
1. Organization of a Corp 2. Issuance of Stock 3. Directors & Officers 4. Shareholders 5. Fundamental Corporate Changes 6. Federal Securities |
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What do incorporators do? |
* Must have 1 or more (person or entity) 1. Execute the articles of incorporation 2. Deliver them to the Secretary State |
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What does it take to form a Corp? |
1. PEOPLE Incorporators (1 or more; real person/entity) 2. PAPER Articles of Incorporation 3. ACT Notarized articles delivered to the Secretary of State & payrequired fees; then, Board holds the organizational meeting, where it selectsofficers & adopts any bylaws & conducts other appropriate business |
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Articles of Incorporation |
K btwn Corp & SH; K btwn Corp & State; Incl: 1. Names & addresses (Corp name; each incorporator; each initial director; registered agent & registered office) 2. Duration (if no statement its perpetual) 3. Statement of Purpose (general okay) 4. Capital Structure (# of authorised; # per class; voting rights/preferences info) |
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Registered Agent of a Corp |
Registered agent is the company’s legal representative, so canreceive service of process for Corp (at the registered office) |
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Corporate name |
Must include one of these “magic words” (or an abbreviation): Corporation, Company, Incorporated, or Limited |
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What if there is no statement in the articles of Corp’s duration? |
It has perpetual existence |
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Statement of Purpose |
General (i.e. "engage in all lawful activity, after firstobtaining necessary state agency approval") In some states, general purpose is presumed and the articles need not say anything about Corp's purpose. |
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De Jure Corporation ("DJC") |
1. Incorporators have notarized articles 2. Delivered Arts to the Secretary of State 3. Paid requisite fees 4. Secretary of State accepted Arts for filing (#4 is conclusive proof of valid formation) |
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“Internal Affairs” Rule |
Corporate internal affairs are governed by the law of thestate of incorporation |
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Corporate Legal Personhood |
It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions Pays income tax on profits & SH taxed on distributions [“doubletaxation”] |
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Authorized stock |
Maximum # of shares the Corp can sell |
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Issued Stock |
#of shares the Corp actually sells |
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Outstanding Stock |
Shares that have been issued and not reacquired |
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S Corporation |
- No more than 100 shareholders - All SH human & U.S. citizens or residents - 1 class of stock & it is not publicly traded - Avoids double taxation (no income tax at corporate level) |
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Corporate "Double Taxation" |
Income tax at corporate level & SH tax on dividends |
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De Facto Corporation (“DFC”) |
Once incorporators have notarized articles delivered to the Secretary of State & payrequired fees, the Secretary of State’s office acceptance of the articlesfor filing is conclusive proof of valid formation |
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Corporation by estoppel |
One who treats a business as a Corp may be estopped from denying that it is a Corp |
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Organizational Meeting |
Subsequent to valid formation, the meeting where officers are selected and Corp bylaws are adopted & other appropriate business is conducted |
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Limited Liability |
Corp is liable for itself Shareholders generally are liable only forthe price of their stock Directors & officers are liable to the Corp, but not personally liable for what it does |
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De Facto Corporation (“DFC”) |
Failed to form De Jure Corp, proprietors are personally liable unless DFC Doctrine applies * Abolished in many states * Must be unaware of failure to form DJC 1. Relevant inc. statute exists 2. Good faith, colorable attempt to comply w/ it; and 3. Exercise of Corp priviliges (act like a Corp) |
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Quo Warranto |
If the DFC doctrine applies, the business is treated as a Corp for all purposesexcept in an action by the state |
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Corporation by Estoppel |
One who treats a business as a Corp may be estopped from denying that it is a Corp * Abolished in many states * Must be unaware of failure to form DJC * If you deal with it as a Corp, you may estopped to deny that the business was a Corp * Prevents improperly-formed “Corp" from avoidingliability saying it wasn't properly formed |
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Bylaws |
Rules for internal governance (i.e. responsibilities of officers,times & places for regular meetings of the board, methods of giving notice, etc.) * Adopted by Board at initial meeting * Internal, not filed * Amended or repealed by SH generally, but in many states also by the Board * Articles of Inc. govern in conflict |
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Pre-Incorporation Contracts |
Promoter is liable (unless K says otherwise) until there is a novation (btwn promoter, Corp, & other P); Corp is not liable until it adopts K Adoption: * Board takes action adopting K (express) * Corp accepts a benefit of K (implied) * Promoter still liable w/o novation (both liable) |
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Foreign corporations |
A Corp formed outside State must qualify w/ cert. of authority from Secretary of State & pay prescribed fees to "transact business" (regular course of intrastate businessactivity > occasional/sporadic activity or just owning property) * Not qualified: civil fine & can't sue in State, but can be sued & defend * Can sue: once qualifies & pays back fees/fines |
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Issuance |
When the Corp sells its own stock (usually as a means of raising capital) Consideration: 1. Money (cash/check); 2. Tangible/intangible property; 3. Services already performed for Corp (Promissory notes & future services are accepted in some state and prohibited in others) Amount: Par (MIP) or no par (board sets price) |
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Subscription |
Written offers to buy stock from a Corp * Pre-incorporation subscriptions can't be revoked for 6 months * Post-incorp. subscrip. are revocable until (subscription agreement) accepted by the Corp |
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Issuance: Amount of Consideration |
Par means “minimum issuance price” (10,000 shares of $3 par stock must get $30k) (accepting less is "watered stock") No par means “no minimum issuance price" and Board sets price Treasury stock is already authorised & Board sets any issuance price it wants Services (past/future) are valued by the Board |
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Watered Stock |
Par stock sold under par value Corp can recover: * Directors are liable (if knowingly authorised) * Purchaser is liable * If transferred to a 3rd P, 3rd P is only liable if they knew about the water |
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Pre-emptive right |
Right of an existing common stock SH to maintainher percentage of ownership by buying stock whenever there is a new issuance ofstock for money (cash/cheque; not property/services) * Doesn't have to buy or buy all * SPLIT on whether it applies to treasury stock * SPLIT on whether exist if Articles are silent |
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Directors (Statutory Requirements) |
Adult natural person (1 or more) Initial directors usually named in Articles * After elected by SH at the annual meeting each year unless there is a "staggered board" |
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"Staggered" Board |
Board is divided into half or thirds, with one-half or one-third electedeach year (usually set in Articles) |
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Directors (Appointment/Removal) |
Initial directors usually named in Articles * After elected by SH at the annual meeting each year unless there is a "staggered board" * SHs can remove directors before their terms expire (w/ majority share vote) with or without cause (only w/ cause for staggered board) * Vacancies can be filled by Board or SH (SH if removed they must fill) |
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Directors (Actions of the Board) |
1. Unanimous agreement in writing 2. Board meeting (w/ quorum & voting reqs) * Individual director actions are void unless ratified by valid act * Individual directors are not agents of Corp (can't speak for or bind the Corp) |
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Board Meetings (Notice) |
1. Regular (no notice req.) 2. Special (req. notice of time/place, not purpose) * Method for notice usually in bylaws * Failure to give notice voids actions unless notice defect waived (in writing anytime or by attending meeting w/o objection) * Proxies or voting agreements void * Conference call attendance is fine |
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Board Meetings (Quorum) |
Any meeting of the board, musthave a quorum * Quorum = majority of alldirectors (unless bylaws say otherwise) * If a quorum is present, passing a resolution requires only a majority vote of those present * Quorum is lost ("broken") if directors leave (different from SH quorum) |
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Directors (Role of the Board) |
Manages the business of Corp (setspolicy, supervises officers, declares distributions, determines stock issuances, recommends fundamental corporate changes to SH) * Can delegate to a committee of 1+ directors |
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Committee of the Board |
Committee of 1 or more directors to which the board delegates certain functions * Cannot declare dividends, set director compensation, or fill a board vacancy * Can make recommendations to the board in these areas |
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Duty of Care |
Director owes Corp a duty of care by acting in good faith & do what a prudent person would do with regard to her own business * Breach: Burden on the plaintiff to show: 1. Nonfeasance (Director does nothing) 2. Misfeasance (Board does something that hurts the Corp – so causation is clear) * Standard: Business judgment Rule(“BJR”) |
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Duty of Care (Breach for Nonfeasance) |
The director does nothing * Fails to attend any board meetings or to keep a breast of the company business * A prudent person would attend some meetings anddo some work Liability: only if breach causes loss to Corp * Expertise in an area may result in higher duty to act (or makes it easier to show causation) |
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Duty of Care (Breach for Misfeasance) |
Board does something that hurts the Corp Liability std: Business Judgment Rule * Did they deliberate? * Did they analyse? * Did they do appropriate homework? If YES, then they will NOT be liable * Director is not a guarantor of success |
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Business Judgment Rule (“BJR”) |
Court will not second-guess a business decision if it was made in goodfaith, was informed, and had a rational basis * Did they deliberate, analyse and do appropriate homework? If YES, then they will NOT be liable * Director is not a guarantor of success |
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Duty of Loyalty |
Director owes Corp a duty of loyalty Breaches arise in 3 circumstances: 1. Interested Director Transaction 2. Competing Ventures 3. Corporate Opportunity (Expectancy) * Burden on the defendant & BJR does not apply where there is a conflict of interest |
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Interested Director Transaction |
Deal between Corp & its director (or a director's close relative or other business) * Will be set aside(or director liable for damages) UNLESS director shows: (1) Dealwas fair to Corp when entered; OR (2) Interest & relevant facts were disclosed/known & deal approved by a majority of either: disinterested directors (special quorum rule in many states interested directors count in quorum); OR disinterested shares * Cts may still require a showing of fairness even if approved (#2) |
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Competing Ventures |
Director cannot compete directly with her Corp * Can't sit on the board of a competitor Remedy: Constructive trust on profits |
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Corporate Opportunity (Expectancy) |
Director can't usurp a "corporate opportunity" (in Corp’s business line; Corp has an interest/expectancy in; and found on Corp time or w/ Corp resources) Director can't take it until: (1) tells the board about it; and (2) waits for board to reject it *Corp's financial inability to pay for the opportunity is not generally a defense * Remedy: Constructive trust/sell to Corp at cost |
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Constructive trust |
Equitable remedy resembling a trust (implied trust) imposed by a court to benefit a party that has been wrongfully deprived * Corp gets the profit from a corporate opportunity usurped (if its already been sold) or from a director engaging in a competing venture |
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Ultra vires Acts |
The doctrine in the law of corporations that holds that if a corporation enters into a contract that is beyond the scope of its corporate powers, the contract is illegal * Responsible officers and directors are liable for ultra vires losses |
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Improper Loans |
Loans to directors are okay if they are generally expected to benefit the Corp (education, etc.) * Sarbanes-Oxley Act (federal law) generally forbids loans to executives in large,publicly-traded (“registered”) corporations |
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Improper Distributions |
Directors are jointly and severally liable but have a good faith reliance defence (on info presented by anofficer, employee, or committee, or professional reasonably believed competent) Shareholders are only personally liable if they knew the distribution was improper when they received it |
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Director's Liability |
Director is presumed to concur with board action unless her dissent/abstention is noted in writing in Corp records: (1) in the minutes; (2) delivered in writing to the presidingofficer at the meeting; or (3) written dissent to Corp immediately after meeting * Without written dissent director can be liable unless absent or good faith reliance |
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Duties of Officers |
Owe same duties of care & loyalty as directors Officers are agents of Corp & agency law applies Can bind theCorp if actual orapparent authority Ex: President generally has inherent authority to bind the corporation to Ks in the ordinary course of business |
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Officers of the Corp |
Traditionally, must have president, secretary, & treasurer (but can have others) * One person can hold multiple offices simultaneously |
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Selection & Removal of Officers |
Officers are selected by and removed by the board, which also sets officer compensation * SHs hire and fire directors, but the boardhires and fires officers * SHs do NOT hire and fire officers * Corp can be liable for employment K damages w/ officers |
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Indemnification of officers & directors |
* Corp MAY NOT indemnify where held liable to the Corp or to have received an improper personal benefit * Corp MUST indemnify officer/director if they win lawsuit * Corp MAY indemnify officer/director if they settle lawsuit & acted in accordance w/ duty of loyalty (as decided by disinterested directors or shares or independent legal counsel) * Court where director or officer was sued can orderreimbursement * Articles can ELIMINATE LIABILITY of director (& in some states officers) to Corp for Duty of Care, but not for Duty of Loyalty breaches |
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Do SHs get to manage the Corp? |
No, its the board's job BUT shareholders can run the corporation directly in a close corporation |
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Close Corporation |
Corporation with few SHs & the stock is not publicly traded * Caneliminate the board and run the corporation directly by: (1) Articles & approval of all SHs; OR (2) unanimous written SH agreement (Managing SH then owe duties to the Corp) * Courts note close Corps functions like partnerships so have appliedpartners’ fiduciary duties btwn SHs [must act in utmost good faith] * Oppression of minority SHs: can sue the controllingSHs who oppress them for breach of this fiduciary duty where legit. interests thwarted |
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“Professional Corporation” “Professional Association” |
Licensed professionals (lawyers, medical professionals, &CPAs) mayinc. as a “P.C.” or “P.A.” to practice in a particular profession (must be stated in Arts) * Directors, officers, & SHs usually must be licensed professionals & are still liable for personal malpractice (SHs generally not liable for Corp obligations or otherprofessionals’ malpractice) |
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"Piercing the Corporate Veil” (PCV) |
SHs are generally not liable for acts of the Corp, but can be held liable by Cts by to avoid fraud or unfairness by SH in a close corporation if: (1) they have abused the privilege of incorporating; and (2) fairness must require holding them liable EX: Alter ego (identity of interests) or undercapitalization |
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PCV Alter ego (identity of interests) |
- Usually where there are few SHs - SH commingles personal & corporatefunds, uses the corporate assets as his own, & uses the corporate accts to pay forpersonal purchases * Other SHs that didn't use corporate assets as their own won't be liable |
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PCV Undercapitalization |
SH failed to invest enough to cover prospective liabilities, a Ct MIGHT PCV because the corporation was undercapitalized whenformed |
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PCV Parent Corporation |
When Cts impose liability on shareholders for what should be a corporate debt, the shareholder can be another Corp * Parent Corp forms a Sub toavoid its own obligations, the Ct may PCV to hold the parent corporation liable |
