Corporations

Front 1

Fact pattern 1: organization of Texas corporations, first sentence

Back 1

All Texas corporations are governed by the Texas Business Code

Front 2

Formation requirements:

Back 2

1. people: We must have one or more organizers. An organizer executes the certificate and delivers it to the secretary of state. Can be a person or an entity and doesn't have to be a TX entity

2. paper: certificate of formation (articles of incorporation

a. a contract between the corporation and the shareholders and between the corporation and the state

b. information in certificate of formation:

1. corporate name (must include corporation, company, or incorporated; must not be misleading and banks formed under another statute) You can reserve an appropriate corporate name with the Secretary of State for 120 days. If the corporation does business under a name other than that in the certificate, it must file an assumed name certificate with the secretary of state and the county clerk in the county of its registered office (or of its principal office if princical office in TX). Cannot sue in TX until it does so (but can be sued)

2. name and address of each organizer

3. number of initial director(s)

4. name and address of each initial director (or if no directors, those who will manage)

5. name of the corporate agent (registered agent) and post office address for the corporate agent. (this agent is the official legal representative for the corporation)

c. If no duration is stated, the corp has perpetual duration

d. The certificate must include a statement of purpose. It could be general (eg to engage in all lawful activity)

1. If does an activity beyond the scope of the purpose (ultra vires activity). Ultra vires contracts are valid. Shareholders can seek an injunction. The responsible managers are liable to the corporation for ultra vires losses.

e. the certificate of information must include: (1) authorized stock (2) number of shares per class and (3) info on par value, voting rights and preferences of each class

3. Act: organizers sign the certificate, deliver it to the Texas Secretary of State, and pay the required fee.

a. If the certificate of formation is in order, the secretary of state files it and sends acknowledgment of filing to the corporation

b. After the secretary of state files the certificate, the corporate existence begins. We have a de jure corporation.

c. Then the board holds an organizational meeting. At the meeting, the directors (1) select officers (2) adopt any bylaws and (3) transact other company business. Should give three days' notice of the meeting.

Front 3

Suppose we form a corp in TX but the company does all its business in Kansas. What law governs the internal affairs (ie roles and duties of directors, officers, and shareholders) of this corp?

Back 3

TX law governs the internal affairs. Care where formed not where they do business.

Front 4

Is a corporation a separate legal person?

Back 4

yes, it can sue, be sued, serve as a partner in a partnership, etc.

Front 5

What is the difference between an S corp and a C corp?

Back 5

A regular C corp pays tax on income. That means there's double taxation--income tax is paid by the entity and by the shareholders on their dividends. How can we legally avoid the income tax at the corporate level? Form an S corp don't pay taxes at the corporate level. S corps have 100 or fewer shareholders, all of whom are human US citizens or residents, only one class of stock, which is not publicly traded.

Front 6

Generally if the corp incurs a debt or breaches a K or commits a tort, are the directors or officers liable for it? Are shareholders liable for it?

Back 6

No and no

the corporation itself is liable for what the corp does

This is limited liability that shareholders are liable only to pay for their stock, not for the business's obligations.

Front 7

What are the requirements for a de facto corporation:

Back 7

1. there is a relevant incorporation statute (there is the TBOC, automatically met)

2. the parties made a good faith, colorable attempt to comply with it, and

3. some exercise of corporate privileges (acting like we have a corporation)

If de facto corporation applies, the business is treated as a corporation for all purposes except in an action by the state. (such an action would be quo warranto)

This doctrine may be abolished in TX. Say in essay this might be abolished but if it isn't...

Front 8

de facto corporation and corporation by estoppel:

Back 8

the proprietors failed to form a de jure corporation, so they will be personally liable for what the business does (because it is just a partnership). Under these doctrines, the business is treated as a corp, so shareholders are not liable for what the business did.

Anyone asserting either doctrine must be unaware of failure to form de jure corporation.

Front 9

What is a corporation by estoppel?

Back 9

one who treats a business as a corporation may be estopped from denying that it is a corporation.

You do business with people who hold their business out as a corporation. They thinks it's a corporation. So do you. You write checks to the corporation and deal with it as a corporation. But there is no corporation. You sue the proprietors individually. Under this doctrine, you cannot win. You are estopped to deny that the business was a corporation.

Can also prevent the business from avoiding liability by saying it was not a proper corporation when it entered a deal.

Generally only applies to tort cases, not contract cases.

This doctrine may be abolished in TX

Front 10

Must a corporation have bylaws?

Back 10

Yes, except in a close corporation

Front 11

Do bylaws require any particular content in the bylaws?

Back 11

No, generally they are for internal governance--eg lay out responsibilities, set regular meeting times and places, prescribe methods of notice. Not filed with the secretary of state.

Front 12

Who adopts the initial bylaws?

Back 12

the board at the organizational meeting

Front 13

Who can repeal or amend the bylaws of a corporation or adopt new ones?

Back 13

the board or shareholders. The certificate can reserve this power to shareholders exclusively.

Front 14

If bylaws conflict with certificate of incorporation, which takes precedence?

Back 14

the certificate but the bylaws can set the number of directors

Front 15

Who is a promoter?

Back 15

A person acting on behalf of a corporation not yet formed. She might contract with a third party on behalf of a corporation that is not yet formed.

Front 16

Is a corporation liable on pre incorporation contracts?

Back 16

No, not until it adopts the contract.

Front 17

How can a corporation adopt a contract?

Back 17

1. express: board action

2. implied: if the corporation accepts a benefit of the contract

Front 18

Unless the contract clearly says otherwise, is the promoter liable on pre-incorporation contracts?

Back 18

yes, until there is a novation, ie an agreement of the promoter, the corporation, and the other contracting party that the corporation replaces the promoter under the contract.

Adoption of a contract makes the corporation liable too, but does not relieve the promoter. Both are liable.

Front 19

Must foreign (non Texas) corporations transacting business in Texas qualify and pay prescribed fees?

Back 19

yes

Transacting business: intrastate transactions on a recurring basis. That means the regular course of business in TX, not just sporadic activity.

Qualify by getting a certificate of authority from TX secretary of state. Apply by giving basic info from certificate and providing good standing in home state.

Once the foreign corp qualifies and pays its fees and fines, it can assert a claim in TX

Front 20

What happens if a foreign corporation transacts business in TX without qualifying?

Back 20

1. civil fine and

2. company cannot sue in TX on a claim arising from business in TX (although it can be sued and defend)

Front 21

What is an issuance?

Back 21

when the corp sells its own stock ( a way for the corp to raise capital)

Front 22

What is a subscription?

Back 22

written, signed offers to buy stock from corp

Front 23

Are Pre-incorporation subscriptions revocable?

Back 23

no, if a pre incorporation offer, they are irrevocable for 6 months

Front 24

Are post incorporation subscriptions revocable?

Back 24

yes, until accepted by the corporation

Front 25

At what point are the corporation and the subscriber obligated under a subscription agreement?

Back 25

when the board accepts the offer and the company notifies the subscriber in writing

Front 26

At what point does a subscriber whose subscription is accepted become a shareholder?

Back 26

when she pays for it

Front 27

What are the forms of consideration for stock?

Back 27

1. permitted: any tangible or intangible benefit to the corporation. That includes money (cash or equivalent), discharge of debt, property, services already rendered for the corp, even notes and contracts for future services.

2. prohibited: anything else. If used, it's unpaid stock (treated as water). difficult to image a prohibited form because permitted benefits so broad.

Front 28

How much consideration must be given?

Back 28

1. par means minimum issuance price (par stock is not required; if we have it, it is set in the certificate). Can always sell for more.

2. No par means there is no minimum issuance price. Board can set any price.

3. Treasury stock: this is stock that was previously issued and has been reacquired by the corp. Treasury stock is authorized (can sell it) and issued but not outstanding. Treat treasury as no par (not initial issuance anymore)

4. When there is an issuance for property or services, the board puts a valuation on the consideration received. This valuation is conclusive absent fraud.

Front 29

What are the consequences of issuing par stock for less than par value; ie watered stock? Who is liable?

Back 29

Directors are liable if they knowingly authorized the issuance.

The guy who bought it is liable (there is no defense, he's charged with notice of par value)

What if the buyer transfers the stock to a third party? the third party is not liable if she did not know about the water

Front 30

What is a pre-emptive right?

Back 30

the right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for money (cash or its equivalent eg check)

"new issuance" includes the issuance of treasury stock

There are also preemptive rights if the issuance is within six months of formation of the corporation (unless certificate says otherwise)

Front 31

If the certificate is silent as to whether there are preemptive rights, are there preemptive rights?

Back 31

no

Front 32

How many directors must there be?

Back 32

one or more natural persons (can't be entity). Initially the number is set in the certificate. After that, the number is set in the certificate or bylaws, can change bylaws.

Front 33

Who elects directors?

Back 33

shareholders elect directors at the annual meeting. Bylaws can provide for "classified board" which divides the board by half or thirds, with half or one-third elected each year

Front 34

Who can remove shareholders before their term expires?

Back 34

This is done by shareholders. They can do this by vote a majority of the shares entitled to vote. Can remove a director with or without cause.

Front 35

If there is a vacancy on the board (eg director resigns), who selects the person who serves the remainder of that term?

Back 35

generally, it is the board or the shareholders

Front 36

The board of directors must act as a group. There are only two ways the board can take a valid act:

Back 36

1. unanimous written consent to do something (email and fax are okay) or

2. a meeting that satisfies quorum and voting requirements

without one of these two valid acts, the act is void

Front 37

Is an individual director an agent of the corporation?

Back 37

no

Individual directors have no authority to speak for or bind the corporation (officers, on the other hand, are agents of the corporation)

Front 38

Is notice required for regular meetings?

Back 38

no

Front 39

Is notice required for special meeting?

Back 39

yes and it must state when and where the meeting is

Front 40

What happens if you fail to give proper notice?

Back 40

it voids whatever was done at the meeting unless the defect is waived by the person not notified--either in writing anytime or by attending without objection.

Front 41

is it okay to give email notice?

Back 41

yes, if the director authorizes it

Front 42

Can directors give proxies for how they will vote as directors? Can directors enter voting agreements for how they will vote as directors?

Back 42

no, both of these are void as against public policy

Front 43

For any meeting of the board, we must have a quorum. Unless the certificate or bylaws, a quorum is

Back 43

a majority of all directors

Front 44

If we have a quorum, passing a resolution (which is how the board takes an act at a meeting) requires:

Back 44

only a majority of those who are present

Front 45

Suppose there are 9 directors in all, 5 show up at the meeting (so we have a quorum). If one of those 5 leaves, do we lose the quorum?

Back 45

yes, the quorum is broken and the board cannot act

Front 46

what is the role of directors?

Back 46

the board manages the business. It sets policy, supervises officers, declares distributions, decides when the corp should issue stock, recommends fundamental corp changes to shareholders, etc.

exceptions:

1. close corporations

2. committee of one or more directors. If the certificate or bylaws allow, the board can appoint a committee, to which it can delegate management power. But a committee cannot: amend bylaws, select officers or recommend a fundamental corporate change to shareholders. Committee can declare dividends only if the certificate or bylaws allow.

Front 47

What is the duty of care standard for directors?

Back 47

a director owes the corporation a duty of care. She must act in good faith and exercise ordinary care and prudence. She must do what a prudent person would do in similar circumstances. Directors owe the corporation non-delegable fiduciary duties.

the burden is on the plaintiff

Front 48

Justin Timberlake, a director of C Corp, fails to attend any of the board of directors' meetings or to keep abreast of corporate affairs in any way. Will he be held liable for breach of the duty of care?

Back 48

State the duty of care standard. A prudent person would attend some meetings and do something to learn about the business. Justin attends no meetings and does nothing for the business, so he has breached the duty of care. But he is liable only if this breach caused a loss to the corporation (hard to show causation in these cases)

If D were an antitrust expert, and in his absence, the board approved a K that violated antitrust law, there may be causation. If he had been prudent (done some work), he could have stopped the board from doing something stupid.

Front 49

The directors of Hot Tubs Inc vote to start a new line of hot buts with built-in wine coolers and video cameras. The idea is a disaster and the company loses money. Have the directors breached the duty of care?

Back 49

State the duty of care standard. Here, the director action caused a loss to the corporation. But, director is not liable if she meets the business judgment rule. Prudent people do appropriate homework. If you do appropriate homework, you are not liable (look to see if they deliberated/analyzed)

The court will not second guess a business decision if it was made in good faith, was informed, and had a rational basis. A director is not a guarantor of success.

Front 50

What is the duty of loyalty standard?

Back 50

A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that her act is in the corporations's best interest.

Front 51

Why does the business judgment rule not apply in duty of loyalty cases?

Back 51

Because it never applies where there is a conflict of interest

Front 52

1 of 3 fact patterns on duty of loyalty: Interested director transaction: This is any deal between the corporation and one of its directors (or the director's close relative or another business of which the director is a manager or has a financial interest)

M is a director of XYZ corp. She sells wreaths to the corporation. That is an interested director transaction. Is M in trouble?

Back 52

State the duty of loyalty standard. Interested director transaction will be set aside unless the director shows: (1) the deal was fair to the corporation when approved or (2) her interest and the material facts were disclosed or known and the deal was approved in good faith by either of those 2 groups (shareholders or a majority of disinterested directors)

Interested directors count towards a quorum (vote doesn't count)

Board can set its own compensation as long as it is reasonable. If pay is excessive, it is a waste of corporate assets, and a breach of the duty of loyalty

Front 53

Fact pattern 2 of 3: competing ventures. S is a director of XYZ music company. She also serves on the board of directors at Home Depot, because it does not compete with XYZ. Can S start her own music company?

Back 53

State the duty of loyalty standard. Director cannot compete with her corporation without approval of a disinterested majority of directors.

Remedy: constructive trust on profits. So if S went into competition with XYZ and made a profit, XYZ would get the benefit.

Front 54

Fact pattern 3 of 3: corporate opportunity: Chad is a director of C corp, which develops condo projects. Chad learns of land recently zoned for condos and buys it for himself as an investment. What are C corp's rights against Chad if any?

Back 54

State the duty of loyalty standard. Director cannot usurp a corporate opportunity. That means that the director cannot take it until he (1) tells the board and (2) waits for the board to reject the opportunity

If Chad still has it, he must sell it to the corp at his cost. If chad has sold it at a profit, the corp gets the profit (constructive trust)

corporation can renounce opportunity in certificate of formation or by board action. That clears the way for a director to take advantage of the opportuntiy

Front 55

What is a corporate opportunity?

Back 55

anything the director has reason to know the company would be interested in

Front 56

What are other bases for director liability?

Back 56

1. Improper loans. can lend corporate funds to a director by vote if reasonably expected to benefit the corporation

2. improper distributions

Front 57

Which directors are liable?

Back 57

A director is presumed to have concurred with the board action unless her dissent or abstention is noted in writing in corporate records. This is done by (1) having it put in the minutes or (2) sending a note to the corporate secretary at the meeting or (3) sending a registered letter to the corporate secretary immediately after the meeting.

Cannot dissent if you voted for the resolution at the meeting and an oral dissent isn't enough.

Front 58

What are the defenses to liability for what the board did?

Back 58

not liable if you were absent from the meeting

good faith reliance on information represented as correct by an officer or provided by a competent professional or by an employee or by a committee of which the director relying was not a member

Front 59

Do officers owe the duties of care and loyalty?

Back 59

yes, same a directors

Front 60

Who are officers?

Back 60

agents of the corporation. They can bind the corporation by acts within their authority. Watch for crossover with agency because officer is agent and corporation is the principal.

inherent authority: the president has authority to convey corporate real property only if the board gives her such authority. Outside that, she might have inherent authority to bind the corporation to a contract entered in the ordinary course of business.

Front 61

What officers must you have in a corp?

Back 61

a president and a secretary. May have more

Front 62

Can one person hold multiple offices at the same time?

Back 62

yes

Front 63

Do officers have to be directors too?

Back 63

no, but they can be

Front 64

Who are officers selected and removed by?

Back 64

the board, which also sets officer compensation

Front 65

Suppose D is sued in her capacity as a director or officer. She incurs costs, attorney's fees, maybe fines, a judgement or settlement. Now she seeks reimbursement of these amounts from the corporation: 3 scenarios

1. reimbursement prohibited. When if the corporation forbidden to reimburse?

Back 65

If the director is held liable for willful or intentional misconduct in performing a duty to the corporation. very narrow

Front 66

2. When is a corporation required to indemnify?

Back 66

if she wins a judgment on the entire case on the merits or otherwise

Front 67

2. When is reimbursement permitted?

Back 67

catchall provision, anything not satisfying the first two above

examples: when the case against her settled

Front 68

What must one show to get reimbursed?

Back 68

she must show that she acted in good faith, and with the reasonable belief that her actions were in the corporation's best interest. Same as duty of loyalty standard.

Front 69

Who determines whether one is eligible to get reimbursed?

Back 69

(1) majority vote of the disinterested directors or of a disinterested committee or of disinterested shares or (2) independent legal counsel.

Regardless of the foregoing, the court in which the director or officer is sued can order reimbursement if tit finds it is justified on the facts.

Front 70

Can the certificate eliminate director and officer for damages?

Back 70

yes, but never for willful or intentional misconduct. Always mention this when you see director/officer claims.

Front 71

Can the company advance litigation expenses?

Back 71

yes if the director or officer gives an affidavit of her good faith belief that she has met the standard for reimbursement and written undertaking to repay the expenses if it s determined that she did not

Front 72

Do shareholders get to manage the corporation?

Back 72

the general answer must be no because the board of directors does

in a close corporation, there need not be a board of directors. Instead, shareholders can take over management, or management can be vested in a single manager, and the company can be run very informally.

Front 73

What is a close corporation?

Back 73

few shareholders (no magic number) and stocks not publicly traded

Front 74

How do you form a close corporation?

Back 74

certificate must say this corporation is a close corporation

Front 75

How do we change the management structure in a close corporation?

Back 75

You need a shareholder's agreement authorizing the change (eg abolishing the board, making management much less formal than an ordinary corporation)

Front 76

How can we enter an agreement to change the management structure?

Back 76

1. in the certificate or bylaws and approved by all shareholders or

2. written agreement of all shareholders

Front 77

Stock certificates should note

Back 77

the close corporation status and that shareholders are to manage, but failure to do so does not affect its validity

Front 78

The corporation should deliver to each shareholder a copy of the agreement, failure to do so

Back 78

does not affect its validity

Front 79

Once the corporation starts operating under the shareholder's agreement, it may deliver a statement of operation to the secretary of state for filing.

Back 79

It makes the manner of operation a matter of public record.

Front 80

Once the statement of operation is filed, the agreement is binding on all shareholders and transferees. Is this true even if a transferee does not have knowledge of the agreement?

Back 80

yes, filing is notice to the world

Front 81

Whenever the shareholders manage the corporation, who owes the duties of care and loyalty to the corporation?

Back 81

the managing shareholders

Front 82

What about duties of the shareholders to each other?

Back 82

In a Texas corporation, shareholders do not owe each other fiduciary duties as a matter of law. (This is different form the rule in many states.) But a court may find a fiduciary duty depending on the facts of a given case. Example: if majority shareholders freeze out a minority shareholder by firing him from employment, refusing to have the company buy back C's stock. C has no voice in management.

Front 83

Are shareholders liable for acts of the corporation?

Back 83

no, because the corporation is liable for what it does

Front 84

But a court may pierce the corporate veil and hold shareholders personally liable if:

Back 84

1. they have abused the privilege of incorporating and

2. limited liability would be unfair

So a court might PCV to prevent fraud or to achieve equity

Front 85

PCV only happens in what kind of corporation?

Back 85

close corporations only

Front 86

PCV is never automatic, but make the argument.

Classic fact pattern: alter ego theory

X and Y are the only shareholders of corp X commingles personal and corporate funds, uses the corporate car as his own, and uses the corporate credit card to pay for personal purchases. In the meantime, corporate creditors are not being paid. Can creditor (unable to collect its claim from the corporation) collect from X or Y?

Back 86

not available for mere failure to observe corporate formalities, such as failure to select officers and hold meetings

Start with general rule (shareholders not liable for acts or debts of corporation). Then PCV standard. Make the argument for PCV (never sure how the court will rule though)

X shareholder abused the corporation by treating corporate assets as his own.

Limited liability for X would arguably be unfair because creditors are not being paid.

Only PCV for X. Y did nothing wrong, so no liability.

Front 87

Classic fact pattern 2: undercapitalization theory

S is a shareholder of glowco inc., a corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. V is injured when one of Glowco's trucks melts down. Can V sue S?

Back 87

Start with general rule (shareholders are not liable for what the corporation does), then PCV standard. Here, a court might PCV because the corporation is undercapitalized. Shareholder failed to invest enough to cover prospective liabilities. How? This is a dangerous business, there is no insurance and they only invested $1,000.

Front 88

In what kinds of cases are PCV most likely?

Back 88

more likely in tort than contract because in contract you can ask to see the corporate books so you can protect yourself

So we cannot PCV for a contract claim based on fraud unless the shareholder made the corporation commit fraud for his own personal benefit

Front 89

What is a derivative suit?

Back 89

shareholder is suing to enforce the corporation's claim, not her personal claim?

Front 90

Question to ask in a derivative suit:

Back 90

could the corporation have brought this suit?

Front 91

S sues the board of directors of C corp for breaching the duty of care or the duty of loyalty. Would these be derivate suits?

Back 91

yes because the corporation could sue because these duties are owed to the corporation (usually breach loyalty or care when derivative)

Front 92

If the shareholder plaintiff wins the derivative suit, what happens?

Back 92

the corporation gets the judgment. The shareholder costs and attorneys fees form the corporation.

After all, S conferred a benefit on the corporation by suing and winning.

Front 93

If the shareholder plaintiff loses, what happens?

Back 93

S doesn't recover costs and attorney fees.

S is liable to the defendant he sued for the defendant's attorney fees if the court finds that S sued without reasonable cause for an improper purpose.

Front 94

What are the requirements for bringing a shareholder derivative suit?

Back 94

1. stock ownership: one must have owned stock when the claim arose or have gotten it by operation of law from someone who did. examples of operation of law: inheritance and divorce decree

2. must also fairly and adequately represent the corporation's interests. This may mean, among other things, that she own stock throughout the litigation.

3. must also make a written demand on directors that the corporation bring suit. Shareholder cannot file a derivative suit until 90 days after demand unless demand is rejected before that or waiting 90 days would cause irreparable damage to the corporation. Demand on the board is never excused, it must be made even if it would be futile. The demand must set forth the nature of the claim with particularity.

4. corporation must be joined as a D (even though we are asserting the corporation's claim) because it did not sue on its own

Front 95

Can the parties settle or dismiss a derivative suit?

Back 95

only with court approval. If the proposed settlement or dismissal may substantially affect shareholders, the court may require notice to those shareholders

Front 96

corporation may move to dismiss based upon determination by independent and disinterested directors (or a committee of two or more such directors). What is the basis of the motion to dismiss?

Back 96

the suit is not in the corporation's best interest

examples: low chance of success, cost of suit would exceed recovery, money would be better spent on advertising or expanding business.

Front 97

In ruling on a motion to dismiss, what is the standard?

Back 97

the court must dismiss if it finds the determination was made in good faith by independent and disinterested directors

In a close corporation of 35 or fewer shareholders, the court might treat a derivative suit as a direct action so the various requirements don't have to be met. Treating it as a direct suit means the recovery would go to the P, not the corporation.

Front 98

Who votes at shareholder meeting?

Back 98

general rule: you vote if you are the record shareholder as of the record date.

Front 99

Who is the record shareholder?

Back 99

the person shown as the owner in the corporate records. The record date is a voter eligibility cut-off set no more than 60 days before the meeting.

Front 100

C corp sets its annual meeting for July 7 and record date for June 8. S sells B her C corp stock on June 25. Who is entitled to vote the shares at the meeting, S or B?

Back 100

S because she owned it on June 8, have to own on the record date.

Front 101

Exceptions to the general rule that record owner on record date votes:

Back 101

1. corporation reacquires stock from shareholders before the record date. So the corporation is the record owner of the treasury stock. It does not vote the treasury stock because it is not outstanding.

2. death of shareholder. S owns stock in C corp; S is the record shareholder. After the record date, S dies. S's executor can vote the shares.

3. proxies: A proxy is a (i) writing (fax and email are ok) (ii) signed by record shareholder (fax and email ok) (iii) directed to secretary of corporation (iv) authorizing another to vote the shares. It is an agency, proxy is your agent.

Front 102

On March 2, 2015, S sends a signed letter to secretary of C corp, authorizing Joe to vote her shares. Can Joe vote S's shares at the 2015 annual meeting in July?

Back 102

Yes that is a proxy

Front 103

Can Joe vote S's shares at the 2016 annual meeting in July 2016?

Back 103

no, it is good for 11 months, unless it says otherwise

Front 104

What if, before the 2015 meeting, S writes to the secretary of c corp that she now wants courtney to vote her shares at the 2015 meeting?

Back 104

that is okay, she has revoked Joe's proxy

Front 105

Can S revoke her proxy even though it states that it is irrevocable?

Back 105

yes, irrevocable means nothing

Front 106

Can we ever have an irrevocable proxy?

Back 106

yes, if it is a proxy coupled with an interest. This requires (1) the proxy says irrevocable and (2) the proxyholder has some interest in the shares other than voting.

eg. an option to buy stock is an interest in the stock

Front 107

What are the requirements for a voting trust? (no time limit imposed by corporate law)

Back 107

1. written trust agreement controlling how the shares will be voted

2. file a copy with the corporation

3. transfer legal title of shares to voting trustee

4. original shareholders receive trust certificates and retain all shareholder rights other than voting

Front 108

What are the requirements for voting (pooling) agreement? (no time limit imposed by corporate law)

Back 108

1. must be in writing

2. copy must be given to the corporation

Front 109

Are voting agreements specifically enforceable against transferees?

Back 109

yes if the affected stock certificates conspicuously note the agreement

Front 110

Can voting trusts and agreements be used for shareholders to agree to elect each other as directors?

Back 110

yes

Front 111

Can shareholders agree on what they will do once they become directors?

Back 111

no because we cannot have voting agreements for director action

Front 112

What are the two ways shareholders can take a valid corporate act?

Back 112

1. unanimous consent in writing and signed or by electronic transmission of holders of all voting shares or

2. a meeting that satisfies quorum and voting rules.

basically the same as directors

Front 113

What are the two kinds of shareholder meetings?

Back 113

1. annual meeting: must be held. If none is held within 13 months, a shareholder may petition the court to order one. Shareholders elect directors at the annual meeting

2. special meeting can be called by (1) the board, (2) the president (3) the holders of at least 10 percent of the shares entitled to vote, or (4) anyone else permitted in certificate

Front 114

Suppose 10% of the shares call a special meeting for the purpose of removing an officer. Is this okay?

Back 114

No because that is not a proper shareholder purpose. Shareholders do not remove officers.

Removing a director is a proper purpose.

Front 115

Must you give notice before a shareholder meeting?

Back 115

yes, must give written notice to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting (21 to 60 days if the meeting is to consider a fundamental change).

Front 116

The notice must always state:

Back 116

when, where, and why (the purpose of the meeting.

The stated purpose matters because the shareholders cannot do anything else at that meeting.

Front 117

What is the consequence of failing to give proper notice to all shareholders required to vote?

Back 117

any action taken at the meeting is void unless those not sent notice (or those who got defective notice) waive the notice defect.

waiver occurs either expressly in writing anytime or impliedly by attending the meeting without objection

Front 118

What do shareholders get to vote on?

Back 118

elect directors, remove directors, and on fundamental corporate changes. They may also vote on other things if the board asks for a shareholder vote on those things.

Front 119

In order to vote, how many shareholders/shares must be present?

Back 119

if there is a quorum represented at a meeting. A quorum requires a majority of outstanding shares.

Front 120

Once a quorum is established, can it be lost if people leave the meeting?

Back 120

no, different from directors

Front 121

If the quorum requirement is met, what vote is required to elect a director?

Back 121

plurality (the person who gets more votes for that seat on the board than anyone else)

Front 122

what vote is required to remove a director?

Back 122

majority of the shares entitled to vote

Front 123

what vote is required to approve a fundamental corporate change?

Back 123

2/3 of shareholders entitled to vote

Front 124

what vote is required for all other matters?

Back 124

majority of the shares that actually vote on the issue

Front 125

What is cumulative voting?

Back 125

It is a device to give small shareholders a better chance of electing someone to the board. Cumulative voting is only available in electing directors.

multiply the number of shares times the number of directors to be elected.

If certificate says nothing about cumulative voting, there is no cumulative voting.

When cumulative voting exists, at least one shareholder must give written notice to the corporate secretary of her intent to cumulate. If one shareholder gives such notice no later than the day before the meeting, all shareholders can vote cumulatively.

Front 126

Where can stock transfer restrictions be set up?

Back 126

certificate, bylaws, or by agreement

Front 127

Stock transfer restrictions are okay if:

Back 127

they are not an undue restraint on alienation.

a right of first refusal is okay, assuming the corporation offers a reasonable price

Front 128

Are stock transfer restrictions enforceable against the transferee?

Back 128

look for transferee's knowledge or notice.

Even if the restriction is valid, it cannot be invoked against the transferee unless either (a) it is conspicuously noted on the stock certificate or (b) the transferee had actual knowledge of the restriction

Front 129

Which shareholders have the right to inspect and copy the books and records of the corporation?

Back 129

any shareholder who has (1) owned stock for at least 6 months or (2) owns at least 5 percent of the outstanding shares

Other shareholders can only inspect with a court order

Front 130

What must a shareholder do in order to inspect the books and records of the corporation?

Back 130

make a written demand stating a proper purpose. A proper purpose is related to your interest as a shareholder.

Front 131

If the corporation does not allow inspection, what happens?

Back 131

the shareholder can get a court order and recover expenses and attorney's fees. If there is litigation, the corporation has the burden of showing that the shareholder's purpose was improper.

Front 132

Do directors have to make a similar showing to get to inspect books and records?

Back 132

no, they have unfettered access. they are managers, so they must have access to this stuff.

Front 133

Payments by the corporation to shareholders can be

Back 133

1. a dividend

2. to repurchase shares or

3. to redeem shares (forced sale to corporation at price set in certificate)

Front 134

Who has the discretion to declare distributions?

Back 134

the board. Shareholders do not have a right to a distribution. They only get dividends when the board declares it.

Front 135

a suit by shareholders to force the declaration of a distribution requires a:

Back 135

strong showing of abuse of discretion. eg if the corporation consistently makes profits and the board refuses to declare a dividend while paying itself a bonus

Front 136

What does preferred stock mean?

Back 136

it means you get paid first

Front 137

Can surplus be used for distributions?

Back 137

yes

Front 138

How is surplus computed?

Back 138

assets--liabilities--stated capital = surplus

Front 139

Can stated capital be used for distributions?

Back 139

no

Front 140

How is stated capital computed?

Back 140

Capital is the par value of the issuance and the excess goes to surplus

Front 141

What does insolvent mean?

Back 141

the company is unable to pay its debts as they become due

Front 142

Who is held liable for an unlawful distribution?

Back 142

directors to the extent it was impermissible

Front 143

Can a director who is held liable for an unlawful distribution seek contribution from the others?

Back 143

yes, from other directors who approved it and from shareholders who knew it was improper when they received it

also think about director defense of good faith reliance.

Front 144

What are fundamental corporate changes?

Back 144

extraordinary occurrences, like selling off all assets or merging, so the board of directors cannot do these alone

Front 145

How do you make fundamental corporate changes?

Back 145

First, the board takes an action adopting a resolution of a fundamental corporate change

Second, the board must submit the proposal to the shareholders with written notice

Third, the fundamental change must be approved by the shareholders by a 2/3 vote.

Fourth, usually, a document is delivered to the secretary of state for filing

Front 146

What is a dissenting shareholder's right of appraisal?

Back 146

the right to force the corporation to buy your shares for fair value

Front 147

Actions by corporation to trigger the right:

Back 147

1. merger (only available to the shareholders from the disappearing corp and only to the shareholders of a subsidiary in a short form merger)

2. sale of shares in a share exchange

3. transfer of substantially all assets, or

4. conversion

But even if the company is doing one of these things, the right is not available if stock is listed on a national exchange or market or has 2,000 or more shareholders. In such a big corporation, there is a public market for the stock, so an unhappy shareholder can sell her stock on the market

Front 148

The right of appraisal exists in what kind of corporation?

Back 148

close corporation

Front 149

Actions by shareholder to perfect the right:

Back 149

1. Before shareholder vote, file with the corporation written notice of objection and of intent to demand payment

2. abstain or vote against the proposed change and

3. after the vote, within 20 days of notification by the corporation, make a written demand to be bought out.

Front 150

Within 20 days of demand, the corporation must notify the shareholder whether it accepts or rejects the demand. If it rejects the demand, it counters with its estimate of fair value. If they cannot agree on fair value, what happens?

Back 150

the shareholder sues to determine value. The court can appoint an appraiser.

Front 151

Is the right to appraisal the exclusive remedy for a shareholder who does not like fundamental change?

Back 151

yes, absent fraud

Front 152

What is need to amend the certificate of formation?

Back 152

1. board of director action and

2. shareholder approval by 2/3 of shares entitled to vote

3. if approved, deliver the amended certificate to the secretary of state for filing

Front 153

What is needed for a merger?

Back 153

1. board of director action (for both corporations) and

2. shareholder approval from the disappearing company (2/3 vote of shares entitled to vote)

Shareholders of the surviving company do not vote (unless their company and rights are substantially changed)

3. If approved, deliver certificate to the secretary of state for filing

Front 154

What is a short form merger?

Back 154

no shareholder approval is required if a 90% or more owned subsidiary is merged into a parent corporation

Front 155

What is the effect of a merger?

Back 155

the surviving company gets all rights and liabilities of the disappearing company

Front 156

What is conversion and what does it require?

Back 156

corporation can convert to another form of business organization. Requires board action and approval by 2/3 of the shares entitled to vote. Deliver certificate of conversion to the secretary of state for filing. Dissenting shareholders can demand appraisal rights.

Front 157

How can a corp voluntarily terminate?

Back 157

1. written consent of all shareholders or

2. board of director action and approval by 2/3 of shares entitled to vote

After either of these is met, send notice of intent to wind up to creditors

Front 158

Can a court revoke voluntary termination?

Back 158

yes if it was fraudulent (which is unlikely). A corporation may revoke its voluntary termination any time before the corp existence ceases

Front 159

Who can seek involuntary termination?

Back 159

1. Texas attorney general

2. creditors

3. a shareholder

In a close corp, if management is so divided that action cannot be taken, a court may avoid dissolution by appointing a provisional director to break the tie votes

Front 160

When can the attorney general institute a proceeding for termination and winding up?

Back 160

1. fraudulent procurement of certificate

2. ultra vires activities

3. misrepresentation in required reports or

4. public interest requires it

very rare on bar

Front 161

Creditors can seek immediate termination based on:

Back 161

irreparable harm to unsecured creditors

Front 162

Creditors can seek appointment of receiver because:

Back 162

the corporation is insolvent and the creditor either has an unsatisfied judgment or the company admits in writing that the amount is due

Front 163

A shareholder can seek appointment of a receiver (can't seek termination immediately) for:

Back 163

insolvency, waste of assets, director deadlock causing irreparable harm to the company, shareholders deadlock and have failed at two annual meetings to fill a vacant board position, or illegal, oppressive, or fraudulent acts by directors.

Mention in shareholder rights for director bad acts, breach of duty derivative suit and also this

Front 164

What is administrative termination?

Back 164

the secretary of state may issue a certificate of termination for corporation's failure to pay fees or failure to maintain registered agent or to file required reports.

Front 165

Does administrative termination require court action?

Back 165

no, the secretary of state issues the certificate of termination

Front 166

Must the corporation be given notice of admin termination?

Back 166

yes, at least 90 days notice. Admin termination makes directors and officers nervous because they are personally liable for debts incurred after termination until reinstatement

Front 167

The comptroller may forfeit a corporation's privileges for failure to pay franchise tax or to file tax reports if the corp does not cure the failure within ____ days of notice

Back 167

45, such forfeiture means that the corp cannot sue or defend cases in state court and each officer and director is personally liable for debts incurred after the date on which the tax is due

Front 168

Does termination end the existence of the corporation right then?

Back 168

no, it triggers the liquidation process (winding up process)

Front 169

What are the steps in the liquidation process?

Back 169

1. gather all assets

2 convert to cash

3. pay creditors and

4. distribute remainder to shareholders pro rata by shares unless there is a liquidation preference (means pay first, so it works like a dividend preference)

Front 170

Who manages the winding up process?

Back 170

Board of directors unless the court decides to supervise

Front 171

After winding up, the corp must deliver a certificate of termination to the secretary of state, including statement that debts have been paid, with any remaining sums having been distributed to the shareholders. What is the effect of the secretary of state's filing of the certificate of termination?

Back 171

that ends the corporate existence

Front 172

How late can claims against the corporation that arose before termination be asserted?

Back 172

within 3 years after termination