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61 Cards in this Set

  • Front
  • Back
What must the articles of incorporation contain?
1. Name and street address of the corp.
2. Name and address of each incorporator
3. Name and street address of registered agent/office
4. Number of authorized shares – maximum # of shares the corp may sell.
What are the default rules for a corporation?
1. Purpose
2. Duration
3. Powers
How is a de jure corporation formed?
- Articles submitted to sec of state, who then files them.
What is a de facto corporation and what does it require?
- Good faith attempt to create a de jure corp under statute and action to do so, but for some reason it didn’t happen fully.
What does a de facto corporation do?
- Shields innocent shareholders from liability
When will courts pierce the corporate veil?
- Alter ego liability (other self)
- Gross undercapitalization
What test is applied under alter ego liability for piercing the corporate veil when there is a parent and a subsidiary involved?
- Mere Instrumentality test – whether the subsidiary was a mere instrumentality of the parent.
Who can adopt by-laws, and who can amend these by-laws?
- Either directors or shareholders. Only shareholders can amend shareholder created by-laws.
When does a corporation become liable on pre-incorporation contracts?
When it adopts them either expressly or impliedly.
Will a promoter remain liable on a pre-incorporation contract after adoption?
Yes
What is the secret profit rule relating to a promoter that acquires property it later conveys to the corporation?
A. Before becoming promoter - Corp. can recover the difference between what it paid and FMV.
B. After becoming promoter - Corp. can recover difference b/t what it paid and what the promoter paid.
What is the rule regarding foreign corporations doing business in NC?
A foreign corp transacting business in NC must qualify to do business in NC.
What does transacting business mean?
1. "Transacting business" means engaging in intrastate transactions in NC on a regular basis.
a. Simply engaging in inter-state transactions is not transacting business.
b. Engaging intra-state on a sporadic basis is also not transacting business.
How does a corp qualify to do business in NC?
"Qualify" by getting a certificate of authority from sec of state.
What are subscriptions?
Signed, written offers to buy stock from the corp.
What is the rule regarding pre-incorporation subscriptions?
irrevocable for 6 months unless the subscription provides otherwise or all subscribers consent.
What is the rule for post-incorporation subscriptions?
revocable until board accepts the offer.
What forms can consideration for stock take?
1. Property - any tangible or intangible property is ok.
2. Promissory note - in NC, this is sufficient.
3. Services performed - yes because have value
4. Services to be performed - in NC, these are ok.
When is the amount of consideration relevant?
1. Par value - minimum issuance price (not FMV)
2. Paying for par value stock with property
a. In NC, the board must only determine that the consideration is adequate. In the absence of fraud, the board's determination of value is conclusive.
3. "Watered stock" liability (paying less than par value for shares)
a. Directors liable only if they knowingly took less than par value.
b. If you buy watered stock, then you are liable for the shortfall (water).
c. If the stock is transferred first, BFP isn't liable for the shortfall. The original buyer is still liable, however.
What do preemptive rights do and how are they treated in NC?
let a shareholder maintain her percentage ownership interest in the corp by buying stock when new stock is issued.
Limited in NC – must be made available by articles of incorp.
How are directors elected?
By shareholders
How are directors removed?
shareholders may remove directors either with or without cause unless the articles provide that directors may be removed only for cause but
1. Class voting - a director elected by a class of shares may be removed only by that class.
2. Cumulative voting - if there is cumulative voting, a director may not be removed if the number of votes sufficient to elect him is voted against his removal.
3. May be removed by a court if there's fraudulent or dishonest conduct.
How are vacancies dealt with?
unless the articles state otherwise, shareholders or directors may fill a vacancy, but if a director whose seat is vacant was elected by a class of shares, only the other directors elected by that class or shareholders of that class may fill it.
What is the rule for director meetings, and when is notice required?
Meetings are required. Notice is only necessary for special meetings
What is a quorum, is it needed for a vote by directors, and can it be broken?
1. need a majority of all directors on the board, unless a greater number is required in the articles or by-laws or a lesser number is permitted by the articles or a shareholder by-law (minimum of 1/3)
a. In NC, a director can break a quorum by leaving before a vote is taken.
Is voting by proxy or by voting agreement allowed for directors?
No
What is the role of directors?
Management. Delegation to committees.
What are a director’s fiduciary duties, owed to whom?
Duty of loyalty, care, owed to corp.
What is the duty of care, what two types?
A director owes the corporation a duty of care. She must do what an ordinary prudent person would do in a like position, under similar circumstances.
A. Nonfeasance - failure to act or pay attention
B. Misfeasance - a director does something that causes the corporation a loss.
1. Protections by Business Judgment Rule. Don't have to be perfect, just careful.
What is the duty of loyalty? What issues normally relate to the duty of loyalty?
Must act in good faith and with a reasonable belief that what she does is in the corporation's best interest.
Conflict of interest, competing venture, usurping corporate opportunity
What are other state law cases of liability against directors?
Ultra vires acts, loans, unlawful distributions
What limits are there on a director’s liability?
Dissenting director, absent director, good faith reliance, raincoat statute
What is the raincoat statute and when is it available?
the articles may shield directors from personal liability for breach of the duty of care if they acted in the best interests of the corp and received no improper personal benefit from the transaction.
Corp must opt into it under articles of incorp. Doesn’t shield from breach of duty of loyalty and isn’t retroactive.
What does the Sarbanes-Oxley Act impose upon CEOs and CFOs?
the CEO and CFO must certify that reports filed with the SEC fairly represent the corporation's financial position. Civil and criminal penalties may be imposed for willfully certifying an untrue report.
When is indemnification of directors barred?
if a director was held (court holding) liable to the corp or held to have received improper personal benefit, indemnification is prohibited.
When is there mandatory indemnification of directors?
if a director is wholly successful on the merits or otherwise.
When is indemnification of directors permissive?
1. Flexible - provided in by-laws or articles, before or after the act occurs.
2. Eligibility - director must show acted in good faith and with reasonable belief that her actions were in the company's best interests.
3. Determination - by disinterested directors/shareholders or independent counsel.
How else can a director be indemnified?
Judicial discretion
Who do controlling shareholders owe a fiduciary duty to?
Minority shareholders
What are the requirements for a shareholder derivative suit?
1. Contemporaneous ownership - plaintiff must have owned shares in corp when the claim arose or acquired them by operation of law from someone who did.
2. Demand - plaintiff must make a demand on the board that the corp bring suit and wait 90 days before filing suit himself.
a. Universal demand requirement - no exceptions.
3. Joinder - corp is joined as a nominal defendant.
4. Dismissal - by disinterested directors or a special litigation committee if they find, after reasonable inquiry, that the suit is not in the corp's best interest. The corp has the burden of showing that the decision-makers were independent and used good faith.
What about a shareholder derivative suit in a public corp?
a. Stake - plaintiff must have owned stock for at least 1 year
b. Timeliness - suit must be brought within 2 years, and
c. Bond - plaintiff may be required to post a bond as security.
Who votes in a shareholder vote?
1. Record owner - the owner listed in the corporate records on the record date has the right to vote. The record date may not be more than 70 days before a meeting.
2. Exceptions
a. Death - shareholder's executor may vote the shares
b. Proxy - the record owner may appoint another person to vote the shares by sending the corp's secretary a signed writing authorizing the other person to vote the shares.
1. Proxy only good for 11 months, unless the first proxy form expressly states otherwise.
What is a voting trust?
1. Written agreement - controlling how shares will be voted (a copy must be filed with the corp)
2. Transfer of title - legal title to shares is transferred to the trustee, who has the irrevocable right to vote them.
3. Certificates - shareholders exchange shares for voting trust certificates, but retain all rights except the right to vote.
4. Duration - limited to 10 years (but can be extended)
What is a voting agreement?
1. Only requirement - written agreement
2. Specific performance - within the court's discretion
3. Enforceable vs. transferee if the existence of the agreement was conspicuously noted on the shares or the transferee knew about the agreement when he acquired them.
4. Duration - limited to 10 years (but can be extended)
When can shareholders vote without a meeting?
a. Unanimous consent - shareholders of any corp may act without a meeting with unanimous consent.
b. Less than unanimous consent - if the articles permit, shareholders of a non-public corp may act without a meeting with consent of the minimum number of shares necessary to act at a meeting at which all shares entitled to vote were present and voting.
How do shareholders vote, and can a quorum of shareholders be broken?
1. Quorum - a majority of the votes (shares!) entitled to be cast must be represented at the meeting, either in person or by proxy.
a. Once a quorum is established at a shareholder meeting, a quorum cannot be broken!
If # of shareholders for > # against, vote passes.
What are the voting methods available to shareholders in electing directors?
a. Plurality - directors are elected by a plurality, unless the articles or a shareholder agreement provides otherwise (thus, the top vote-getters are elected, whether they get a majority or not).
b. Straight voting - a shareholder may vote the number of shares he owns for as many persons as there are directors to be elected.
c. Cumulative voting - multiply number of shares owned by the number of directors to be elected. Shareholder can cast the product for one candidate or divide it up among several.
1. Current NC law requires that this be provided for in articles of corp for corps created after July 1, 1990.
When are stock transfer restrictions valid, and what are some examples?
When reasonable - right of first refusal, prohibiting on selling shares to a particular party, right of corp to approve sale
What are the rules relating to inspection rights of qualified shareholders?
A. "Qualified" - must have owned shares for at least 6 months or own at least 5% of any class of the corporation's shares.
B. Absolute right - a qualified shareholder may inspect articles, by-laws, minutes of shareholder meetings and a list of current directors and officers.
C. Limited right - to inspect other records, a qualified shareholder must have a proper purpose - related to being a shareholder (communicate w/ other shareholders about corp waste, not to get a list of potential clients)
1. Written demand at least 5 days before inspection
D. Nonpublic corps - a shareholder has no right to inspect accounting records if it would adversely affect the corp or involves material inside info.
E. Refusal - shareholder can get a court order, costs and attorney fees.
F. No "strings" - articles and by-laws cannot restrict inspection rights.
How are dividends determined (whether to give them out)?
1. Dividends are within the board's discretion. A court won't compel a dividend without a strong showing of abuse of discretion.
a. Exception - a corporation with less than 25 shareholders may be compelled to declare a dividend of 1/3 of the net profits on the demand of the holders at least 20% of any class of shares.
1. However, board can assert the reasonable needs of the corp as a defense
Which shareholders get dividends?
1. Preferred shares = paid first, not paid more.
2. Participating preferred = get paid again (after getting paid first)
3. Cumulative participating preferred = if dividend isn't paid, it carries over into subsequent years.
What is the test regarding dividends made by a corporation?
A. a corp may make a distribution only if, after making the distribution, the corp is able to satisfy both of the following tests:
1. Solvency test - after giving effect to the distribution, it must be able to pay its debts as they become due in the ordinary course of business.
a. Cash flow analysis is appropriate
2. Balance sheet test - after giving effect to the distribution, the corp's assets must exceed its liabilities.
What are the requirements for amendment of the articles of incorporation?
1. Board approval and
2. Shareholder approval
a. Use regular quorum/voting requirements
1. Exception - if the rights of a particular class are adversely affected, an absolute majority of that class (a majority of all shares of that class, not just the shares represented at the meeting) must separately approve, even if that class ordinarily has no voting rights.
What are the requirements for a merger? Exception?
1. Approval by the boards of both corps and
2. Approval by an absolute majority of shares of both corps
Short-form merger - no shareholder approval is required where a 90% or more owned subsidiary is merged into its parent or vice versa
Who gets to vote in a share exchange?
only shareholders of the target corp get to vote.
What are the requirements in a sale of substantially all assets outside usual course of business?
1. Approval by the boards of both corps and
2. Approval by an absolute majority of the selling corp's shares only.
When are a shareholder’s appraisal rights available?
1. Merger (only for shareholders of the sub in a short-form merger)
2. Share exchange (only for shareholders of the target corp)
3. Amending articles (only for shareholders adversely affected)
4. Transfer of substantially all assets outside usual course of business (only for shareholders of selling corp, and only if the proceeds will not be distributed).
What are the rules regarding a voluntary dissolution?
1. Procedure - approval by the board and an absolute majority of shares
2. Filing - must file articles of dissolution with sec of state
3. Winding up - creditors are paid first, then dissolution preferences; whatever is left is distributed pro rata among the common shares.
4. Revocation - can revoke dissolution within 120days
When can an involuntary dissolution occur?
1. Petition of state A.G. - if corp is abusing its authority.
2. Petition of unsatisfied judgment creditor
3. Petition of shareholder
a. Director deadlock - and if there is irreparable harm to the corp.
b. Shareholder deadlock - and can't elect new directors for 2 years.
c. Waste of corp assets - extremely high standard - very hard to show.
d. Reasonably necessary to protect rights - very difficult standard to satisfy.
AT COURT’S DISCRETION
What transactions can raise a rule 10b-5 cause of action?
A. Misrepresentation - fraud
B. Non-disclosure - broader than common law fraud
C. Tipping - passing along inside information for a wrongful purpose
What are the elements in a civil action under rule 10b-5?
A. Plaintiff - must be a buyer or seller of securities or the SEC.
B. Defendant - any "person" can be a defendant
C. Materiality - info a reasonable shareholder would consider important
D. Interstate commerce - use of a means or instrumentality of interstate commerce (use of the mails, telephone, newspaper, national securities exchange)
E. SoL - action must be brought no later than 1 year after discovery and 3 years after the transaction.
F. Scienter - defendant must have intended to defraud. Negligence is not enough!