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35 Cards in this Set
- Front
- Back
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Promoters |
Persons acting on behalf of a corporation not yet formed. |
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Who is liable when a promoter enters into a contract before the corporation is formed? |
The corporation becomes liable on a promoter's pre-incorporation contract when the corporation adopts the contract by either: (1) express board of directors resolution, or (2) implied adoption through knowledge of contract plus acceptance of its benefits. The promoter remains liable on pre-incorporation contracts until there has been a novation. |
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Who is liable if the promoter enters a contract, and the corporation is never formed? |
Promoter alone is liable personally on that contract. |
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Who is liable if the promoter enters a pre-incorporation contract and the corporation merely adopts the contract? |
Both the corporation and the promoter are liable at the election of the 3rd party. |
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Subscribers |
Persons or entities who make written offers to buy stock from a corporation not yet formed. |
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Formation Requirements - Incorporators |
Sign and file the articles of incorporation. |
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What must the articles of incorporation include? |
A.P.A.I.N. a. Authorized shares b. Purpose c. Agent d. Incorporators e. Name of corporation |
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By-Laws |
The corporation need not adopt bylaws. The board has the power to adopt and amend the by-laws, unless the Articles give the power to shareholders. |
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De facto corporation doctrine |
A business failing to achieve de jure corporate status nonetheless is treated as a corporation if the organizers have made a good faith, colorable attempt to comply with corporate formalities and have no knowledge of the lack of corporate status. |
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Piercing the corporate veil |
General rule is a shareholder is not liable for the debts of the corporation. However, courts will pierce the corporate veil to avoid fraud or unfairness. 1. Alter ego - failure to observe sufficient corporate formalities; 2. Undercapitalization - Failure to maintain sufficient funds to cover foreseeable liabilities. |
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Preemptive Rights |
The right of any existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash. *In IL, and majority rule, preemptive rights do not exist unless expressly granted in the articles. |
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Statutory Requirements - Directors |
1. Corporations must have a Board with at least 1 member. 2. Shareholders elect directors. 3. Shareholders can remove a director before her term expires - with or without cause. 4. Valid meeting |
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Rules for valid meeting of the board of directors |
a. Unless all directors consent in writing to act without a meeting, a meeting is required. b. Notice of directors' meeting can be set in bylaws. c. Proxies are not allowed. Also, no voting agreements. Conference calls now generally valid. d. Quorum - must have a majority of all directors to take action (unless different % required by by-laws). e. Vote - To pass a resolution, however, all that is required is a majority vote of those present. f. Each director is presumed to have concurred in Board action unless her dissent or abstention is recorded in writing. |
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Business Judgement Rule |
A presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders. As such, directors will not be liable for innocent mistakes of business judgment. |
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Director's Duty of Care |
Must act with the care that a prudent person would use in managing her own business, unless the Articles have limited director liability for a breach of the duty of care. |
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Director's Duty of Loyalty |
Director may not receive an unfair benefit to the detriment of the corporation or its shareholders, unless there has been material disclosure and independent ratification. a. self-dealing b. usurping corporate opportunities |
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Ratification - Defense to loyalty violation |
Directors may defend a claim by obtaining independent ratification through (i) a majority vote of independent directors; (ii) majority vote of a committee of at least 2 independent directors or (iii) majority vote of shares held by independent shareholders. |
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Officers |
1. Owe the same duties of care and loyalty as directors. 2. Are agents of the corporation and bind the corporation by their authorized activities. 3. Directors have virtually unlimited power to select officers and may remove them from office at any time - but the corporation will be liable for breach of contract damages. |
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Indemnification of Directors and Officers |
1. The corporation may never indemnify a director who loses a lawsuit to their own corporation. 2. The corporation must always indemnify if directors or officers win a lawsuit against any party. 3. The corporation may indemnify if: (a) liability to third parties or settlement with the corporation; (b) director or officer shows that she acted in good faith and that she believed her conduct was in the corporation's best interest. |
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Who may determine whether to grant permissive indemnity? |
1. Majority vote of independent directors. 2. Majority vote of a committee of at least 2 independent directors; 3. Majority vote of shares held by independent shareholders; or 4. Special lawyers opinion could recommend it. |
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Shareholder Derivative Suit |
In a derivative suit, a shareholder is suing to enforce the corporation's cause of action. Requirements: (i) contemporaneous stock ownership, (ii) adequacy, (iii) must make demand on directors that they cause their own corporation to bring suit, and demand must be rejected by board or at least 90 days must have passed since demand made. *But in IL, demand can be excused if the shareholder can allege with particularity that demand would be futile. |
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Who has right to vote at an upcoming meeting where voting occurs? |
Only record date owners have the right to vote. Record date is the voter eligibility cut off date set by the board on any day up to 70 days before the meeting date. |
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Shareholder voting proxies |
A proxy is a (i) writing, (ii) signed by record shareholder, (iii) sent to secretary of corporation, (iv) authorizing another to vote the shares, (v) valid for only 11 months. Proxies are revocable unless they are labeled "irrevocable," and they must be coupled with an interest. |
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Where do shareholders vote? |
a. Properly noticed annual meeting. (1) Every corporation must have annual meeting, at which at least 1 director position is open for election. (2) Notice must include time and place of meeting. b. Specially Noticed Special Meeting. (1) meeting of the shareholders to vote on a proposal or a fundamental corporate change. (2) special notice includes the special purpose because nothing else can happen at the meeting that is not in the notice. |
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Quorum |
There must be quorum represented at the meeting. Determination of a quorum focuses on the number of shares represented, not the number of shareholders. A quorum requires a majority of outstanding shares when the meeting begins, unless otherwise provided in the Articles. |
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Dividends |
To be declared in the board's discretion unless the corporation is insolvent or would be rendered insolvent by the dividend. Board members are liable personally for unlawful distributions, but have a defense of good faith reliance on financial officer's representations regarding solvency. |
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Shareholder Agreements to Eliminate Corporate Formalities (Closely-Held Corporations) |
Requirements: Unanimous shareholder election evidenced in the articles, the bylaws, or a filed agreement. Reasonably share transfer restriction. Consequences: No piercing even if you fail to observe formalities. Likely subchapter S corporation status, which means corporation can be taxed as a partnership if it has no more that 100 owners of stock and only one class of stock. |
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Professional Corporation |
Licensed Professionals may incorporate as a Professional Corporation. Requirements: Organizers file Articles with name designated "Professional Corporation" or PC. The shareholders must be licensed professionals. The corporation may practice only one designated profession. Consequences: The professionals are liable personally for their own malpractice. But, the professionals are not liable personally for each other's malpractice or the obligations of the corporation itself. |
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Limited Liability Companies |
A hybrid between corporation and partnership in which the owners (members) have the same rights and limited liability as shareholders in a corporation plus the benefits of partnership tax treatment. Formation Requirements: File articles of org and may adopt an operating agreement. Control: Members may control the business of they may delegate their control to a team of managers. Limited Liability: A full membership interest may not be transferred without unanimous consent of the members or as provided in the operating agreement. Limited Life: Company will dissolve upon unanimous consent of members or as provided otherwise in the operating agreement. |
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Recognized Fundamental Corporate Changes |
Merger, consolidation, dissolution. Fundamental (not ministerial) Amendment of the Articles; Sale (not purchase) of substantially all of the corporations assets. |
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Procedural Steps for Fundamental Corporate Change |
1. Resolution by Board at Valid Meeting 2. Notice of Special Meeting 3. Approval by a majority of all shares entitled to vote, and by a majority of each voting group that is adversely affected by the change. *In IL, 2/3 of all shares and 2/3 of each voting group required. Except: No shareholder approval required for "short-form" merger where a parent corporation that owns 90% or more of the stock in its subsidiary merges with the subsidiary. 4. File notice with the state. |
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Possibility of dissenting shareholder right of appraisal. |
A shareholder who does not vote in favor of a fundamental change has the right to force the corporation to buy her shares at fair value. Actions by shareholder to perfect the right: (1) before shareholder vote, file written notice of objection and intent to demand payment; (2) do not vote in favor of the proposed change; (3) make prompt written demand to be bought out. |
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Section 10(b) of the Securities Exchange Act of 1934 |
Essential elements of §10(b) action: Sceinter, deception, in connection with the actual purchase or sale of securities. In addition for private action for damages, investors must prove reliance and loss causation. |
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Section 16(b) - Strict Liability for Short-Swing Trading Profits. |
When does it apply? Big corporations that must report to SEC, big shot defendant. Strict liability if defendant profits by buying and selling, or selling and buying their corporations own stock within 6 months. |
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Sarbanes Oxley Act of 2002 |
For reporting corporations. CEO and CFO must certify that based on the officer's knowledge, reports filed with the SEC do not contain falsehoods. Willfully certifying a false report could bring $5 million and 20 years. If false reports have to be corrected and restated, the corporation (directly or derivatively) may recover officer's benefits made from trading the company's securities within 12 months after the false reports were filed. Corporations (directly or derivatively) may also recover any benefits made my officers from trading corporation's stock during "black out" periods when employees are prohibited from trading in their retirement plan's securities. |
