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54 Cards in this Set
- Front
- Back
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1. PRE-Incorporation Contracts --Promoters and Subscribers
a. SUBSCRIBERS |
Pre-incorporation written offers to buy stock are irrevocable for 6 months.
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1. PRE-Incorporation Contracts --Promoters and Subscribers
b. PROMOTERS - Persons acting on behalf of a corporation NOT yet formed i. Liability |
Corporation becomes liable upon adoption and the promoter remains liable until novation
1. Corporation becomes liable on a promoter's pre-incorporation contract when the corporation Adopts the contract by a. Express Resolution of the Board of Directors in writing b. Ratification – Implied adoption through knowledge of the contract and acceptance of its benefits 2. Promoter remains liable until there has been a novation. a. Novation – an agreement between the promoter, the corporation, and the third party that the corporation will replace the promoter under the contract b. Note – If the corporation never forms, Promoter alone remains liable. c. Reimbursement – May have a right of reimbursement by the corporation for benefits received. |
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1. PRE-Incorporation Contracts --Promoters and Subscribers
ii. Fiduciaries – Promoters owe a duty of loyalty to each other and the corporation. |
1. Loyalty – the promoter cannot engage in self dealing, usurping corporate opportunities, or make a secret profits on their dealings with the corporation
2. Sale to the Corporation of Property Acquired: a. BEFORE becoming a promoter – profit recoverable by corporation ONLY if sold for more than fair market value b. AFTER becoming a promoter – ANY profit is recoverable by the corporation. 3. Remedy – May disgorge profits and sue for losses. |
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2. CORPORATION Characteristics
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a. Limited Liability for its Owners, Directors, and Officers
b. Centralized Management c. Free Transferability of Ownership d. Perpetual existence e. Taxation – Double taxation |
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
a. Articles of Incorporation – Must Include: (A PAIN) i. Authorized Shares |
Maximum number of shares that the corporation is authorized to issue.
1. Note – May always issue or sell less, but may never issue or sell more without amending the Articles |
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
a. Articles of Incorporation – Must Include: (A PAIN) ii. Purpose |
1. General Purpose and Perpetual Duration are valid and will be presumed valid in the absence of a specific purpose or limited duration.
a. i.e. "engage in all lawful activity in perpetuity" 2. Specific Purpose / Duration (Ultra Vires) – May state a specific purpose in the Articles of Incorporation. (i.e. “purpose is to sell t-shirts for 5 years”) a. Ultra Vires – Beyond purpose of corporation b. Remedy for Ultra Vires Activity i. The State or a Shareholder can sue to enjoin the ultra vires activity ii. The corporation may sue its own directors and officers for losses caused by the Ultra Vires activity. (i.e. failed to obey articles) |
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
a. Articles of Incorporation – Must Include: (A PAIN) iii. Agent |
iii. Agent – and address of registered office (registered agent is the corporation's official legal representative for service of process)
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
a. Articles of Incorporation – Must Include: (A PAIN) iv. Incorporators |
Name and Address of the person who signs and files the Articles of Incorporation with the State
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
a. Articles of Incorporation – Must Include: (A PAIN) v. Name of Corporation |
The name of the corporation must contain some indicia of corporate status (Inc., Incorporated, Corp., Corporation)
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
b. By-Laws |
Laws by which the corporation is governed.
i. The corporation need NOT adopt By-laws. ii. The board has the power to adopt and amend the by-laws, unless the Articles give the power to the Shareholders |
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
c. De Facto Corporation Doctrine |
A business failing to achieve de jure corporate status nonetheless is treated as a corporation, if:
i. Organizers have made a good faith, colorable attempt to comply with corporate formalities, AND ii. Have NO knowledge of the lack of corporate status. |
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
d. Corporation by Estoppel |
Applies in Contracts to prevent a corporate entity and parties who have dealt with the entity as if it were a corporation, from backing out of their contracts.
i. Note – this exception only applies to contracts and NOT to torts. |
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
e. Legal Significance of Formation (2 key points) |
i. Separate Legal Entity – Corporation becomes separate legal entity
ii. Limited Liability –Shareholders are NOT personally liable for debts and obligations of the corporation except for the price of his stock. |
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
f. Piercing the Corporate Veil |
i. General rule – A shareholder is NOT liable for the debts or obligations of a corporation.
ii. (FU) Exception – Piercing the corporate veil to avoid fraud and unfairness 1. Alter-Ego – Failure to maintain sufficient Corporate Formalities (Commingling) 2. Undercapitalization – Failure to maintain Sufficient Funds to cover Foreseeable Liabilities (Dangerous business without insurance or capitalization) 3. Prevent Fraud – Necessary to prevent fraud. iii. Note – courts are generally more willing to pierce the corporate veil for a tort victims rather than a contract claimant (I.e. Injury vs. Passive investor) |
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3. FORMATION Requirements (De Jure Corporate Status) – Existence begins on filing.
g. Foreign Corporations |
A corporation incorporated outside the state that wishes to engage in a regular intrastate business must qualify by filing a Certificate of Authority with the Secretary of State that includes ALL of the information required in the Articles of Incorporation.
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4. Issuance of Stock – When a Corporation sells its own Stock. (i.e. NOT 3rd parties reselling)
a. Preemptive Rights |
– right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash
i. Note – NO preemptive rights unless expressly granted in the Articles of Incorporation |
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4. Issuance of Stock – When a Corporation sells its own Stock. (i.e. NOT 3rd parties reselling)
b. Consideration |
What must the corporation receive when issuing stock
i. Par value – Minimum issuance price. May never receive Less than par value. 1. Acquiring Property with par value stock – Any valid consideration may be received if the Board values the consideration in good faith to be worth at least par value. ii. No Par Value – NO minimum issuance price. 1. May be sold for any valid consideration deemed adequate by the Board. iii. Treasury Stock – Previously issued stock that has been reacquired by the corporation. 1. May be sold for any valid consideration deemed adequate by the Board. iv. Consequences of Issuing Par Stock for Less than Par Value (Below par issuance) 1. Directors are liable personally. (i.e. No authority to issue) 2. Shareholders are liable for paying full consideration for his shares. |
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5. DIRECTORS and OFFICERS
a. Statutory Requirements for Directors |
i. Corporation must have a Board with at least ONE member
ii. Shareholders elect directors iii. Shareholders can remove a director before her term expires with or without cause. iv. Valid Meeting – To execute action the board must call a meeting and pass a resolution. 1. Meeting Required – Unless ALL directors consent in writing to act without a meeting, a meeting is required 2. Notice – Notice of directors' meeting can be set in bylaws 3. Directors Must Personal Vote – Proxies are not allowed. Also, no voting agreements. But conference calls now generally valid 4. Quorum – To take action you must have a majority of ALL directors present a. Unless a different percentage is required in bylaws 5. Vote – To pass a resolution, all that is required is a majority vote of those directors present. a. Hypo – 9 directors, need 5 for quorum, and 3 votes to pass a resolution. v. Concurrence – Each director is presumed to have concurred in Board action unless her dissent or abstention is recorde |
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b. LIABILITY of DIRECTORS (to the Corporation and Shareholders)
i. Duty to Manage |
Directors have a duty to manage the corporation
1. Delegation – Directors may delegate management functions to a committee of one or more directors that recommends action to the Board. 2. Note – Shareholders have no power to manager but they elect directors. |
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b. LIABILITY of DIRECTORS (to the Corporation and Shareholders)
ii. Business Judgment Rule |
Directors are protected from liability by the BJR.
1. BJR – a presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders a. i.e. Directors will not be liable for innocent mistakes of business judgment. |
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b. LIABILITY of DIRECTORS (to the Corporation and Shareholders)
iii. Fiduciaries – Directors fiduciaries who owe the corporation duties of care and loyalty |
iii. Fiduciaries – Directors fiduciaries who owe the corporation duties of care and loyalty
1. Duty of CARE – (Prudence) – Duty to act with the care that a prudent person would use with regard to her own business, unless the Articles of Incorporation have limited director liability for a breach of the duty of care. a. i.e. Directors who study thoroughly or have personal knowledge are not liable. Directors who don’t attend meeting, sleep through meetings or study are liable. |
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b. LIABILITY of DIRECTORS (to the Corporation and Shareholders)
iii. Fiduciaries 2. Duty of LOYALTY |
– A director may NOT receive an unfair benefit to the detriment of the corporation or its shareholders, unless there has been a material disclosure and independent ratification.
a. Self-Dealing – director who receives an unfair benefit to herself (or her relative, or another one of her businesses) in a transaction with her own corporation. b. Usurping Corporate Opportunities – director receives an unfair benefit by usurping for herself an opportunity which the corporation would have pursued. Must first give notice to the corporation and allow the corporation a chance to pursue it. i. If no opportunity was presented to the corporation they can disgorge profits. c. Ratification – Independent directors may ratify an unfair benefit with a material disclosure AND ratification by: i. Majority vote of independent directors ii. Majority vote of a committee of at least 2 independent directors iii. Majority vote of by independent Shareholders d. Result – If there is no disclosure the transact |
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b. LIABILITY of DIRECTORS (to the Corporation and Shareholders)
iv. OFFICERS – Owe same duties of care and loyalty |
1. Agents – Officers are agents of the corporation and bind the corporation by their authorized activities
2. Necessary Officers – Corporations must have a President, Secretary,& Treasurer 3. Select and Remove – Directors have virtually unlimited power to select officers, and may remove officers from office at any time. a. But Note – the corporation may be liable for breach of contract damages |
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b. LIABILITY of DIRECTORS (to the Corporation and Shareholders)
v. INDEMNIFICATION of Directors and Officers |
1. Director or Officers that have incurred costs, attorneys fees, fines, a judgment or settlement in the course of corporate business, may seek indemnity from the corporation.
a. The corporation may NEVER indemnify a director who is held liable to their own corporation in the lawsuit. b. The corporation MUST ALWAYS indemnify if a director or officer wins a lawsuit against any party, including their corporation. c. The corporation MAY indemnify directors or officers if: i. Liability is incurred to third-parties (judgment or settlement), AND ii. Director or officer shows that she acted in good faith and that she believed her conduct was in the corporation's best interest d. Who may determine whether to grant Permissive Indemnity i. Majority vote of independent directors. ii. Majority vote of committee of at least two independent directors iii. Majority vote of shares held by independent shareholders iv. Special legal counsel opinion can recommend |
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6. Rights of SHAREHOLDERS
a. Shareholder Direct Suits |
For a breach of fiduciary duty owed to the shareholder
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6. Rights of SHAREHOLDERS
b. Shareholder Derivative Suits |
In a derivative suit, a shareholder is suing to enforce the Corporation's cause of action (ask could the corp have brought the suit? If yes its derivative suit)
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6. Rights of SHAREHOLDERS
b. Shareholder Derivative Suits i. Requirements – for bringing a shareholder derivative suit |
1. Contemporaneous stock ownership gives standing for suit
a. Must own at least one share of stock: i. When the claim arose, and ii. Throughout every stage of litigation. 2. Demand – Must generally make demand on directors to bring suit. a. Demand must be: i. Made and rejected by the Board OR ii. At least 90 days pass since demand was made |
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6. Rights of SHAREHOLDERS
c. Voting i. Right to vote |
Only the record date owner has the right to vote
1. Record Date Owner – the owner of the stock at the voter eligibility cut-off date set by the board within 70 days of the meeting date. |
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6. Rights of SHAREHOLDERS
c. Voting ii. Proxies |
1. Requirements: (5) (Writing, Signed, Sent, Authorizing, within 11 months)
a. Writing (fax or email generally valid) b. Signed by record shareholder c. Sent to secretary of corporation d. Authorizing another to vote the shares e. Valid for only 11 months 2. Revocable – Proxies are freely revocable unless: a. It states that the proxy is irrevocable, AND b. It must be coupled with an interest i. i.e. authorize a proxy to vote the shares with a sale in the interest of the shares to the proxy. |
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6. Rights of SHAREHOLDERS
c. Voting iii. Meetings / Notice |
1. Annual Meeting – Corporation must have a properly noticed annual meeting
a. Notice – Notified of the meeting not less than 10 or more than 60 days before the meeting. Notice must contain the time and place of the meeting. b. One Board Opening – Must have at least one Board slot open for election at the annual meeting 2. Specially Noticed Special Meeting – Called by the Board, the President, or 10% of the voting shares a. Vote only on a proposal or fundamental corporate change b. Notice – must also contain the meetings special purpose. c. Note – Nothing else can take place at the meeting otherwise it will be void |
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6. Rights of SHAREHOLDERS
c. Voting iv. Quorum |
A quorum requires a majority of outstanding SHARES to be present when the meeting begins, unless otherwise provided in Article. (i.e. # of shareholders is irrelevant)
v. Vote – If quorum is present, action is approved if the votes cast in favor of the proposal exceed the votes cast against the proposal. (Ex: 80k quorum. 50k vote. 25,001 to pass) |
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6. Rights of SHAREHOLDERS
c. Voting vi. Pooled or Block Voting Methods |
Shareholders who own relatively few voting shares decide that they can increase their influence by agreeing to vote alike: (2 ways)
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6. Rights of SHAREHOLDERS
c. Voting vi. Pooled or Block Voting Methods 1. Voting trusts – Formal delegation of voting power to a voting trustee valid for 10 years. |
Formal delegation of voting power to a voting trustee valid for 10 years.
a. Written agreement b. Filed with Corporation c. Transfer shares to Voting Trustee d. Shareholders get trust certificates; and e. Shareholders retain ALL other rights except for voting f. Duration is 10 years, unless extended by agreement |
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6. Rights of SHAREHOLDERS
c. Voting vi. Pooled or Block Voting Methods 2. Voting Agreements |
a. Requirements – Agreement in writing to vote shares as required in the agreement
b. Enforceable – Binding and enforceable on ALL signers with NO time limit and NO filing required |
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6. Rights of SHAREHOLDERS
c. Voting vi. Pooled or Block Voting Methods 3. Cumulative Voting for Directors |
Minorities ability to elect at least one director.
a. Generally – 1 vote for 1 share b. Cumulative Voting – Multiply the number of shares by the number of directors to be elected. c. Rule – Presumption that there is NO right to cumulative voting unless the right is granted in the Articles. |
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6. Rights of SHAREHOLDERS
d. Shareholder Right to Examine the Books and Records of the Corporation |
i. Any shareholder shall have access to books and records upon notice at proper times
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6. Rights of SHAREHOLDERS
e. Dividends – Shareholders have NO right to dividends |
i. Boards Discretion – Dividends are declared at the Board's Discretion unless the corporation is insolvent or would be rendered insolvent by the dividends.
ii. Personal Liability – Board member's are liable personally for unlawful distributions, but have a defense of good faith reliance on financial officer's representations regarding solvency. iii. Priority of Distribution 1. Common stock gets paid Last and paid Equally 2. Preferred stock gets paid First a. Participating – Get paid twice. Get paid first as preferred stock and also participate in the common stock distribution. b. Cumulative – If one payment is missed, two are due next period. i. i.e. prior missed payments and the current payment is due. |
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6. Rights of SHAREHOLDERS
f. Closely-Held Corporation |
Shareholder Agreements to Eliminate Corporate Formalities
i. Requirements: 1. Unanimous Shareholder Election in the Articles, By-laws, or in a Filed Written Agreement 2. Reasonable Share Transfer Restriction (i.e. No public trading or similar) ii. Benefits: 1. NO piercing of the corporate veil even if you fail to maintain formalities 2. Possible Sub-chapter S corporation status a. Benefit of S Corp.– Treated as a partnership for tax purposes b. Requirements to become an S Corp. i. No more than 100 Shareholders, who are individuals and American residents ii. No more than ONE class of stock |
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6. Rights of SHAREHOLDERS
g. Professional Corporations |
Licensed Professionals (lawyers, accountants, medical) may incorporate as Professional Corporation (PC)
i. Requirements 1. Organizers file Articles with name designated as "PC" 2. Shareholders must be licensed professionals 3. Corporation may practice only ONE designated profession 4. Professionals are liable personally for their OWN malpractice 5. Professionals are NOT liable for each other's malpractice OR the obligations of the corporation itself. |
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6. Rights of SHAREHOLDERS
h. Shareholder Liabilities |
i. General Rule – Shareholders are not liable for corporate obligations
ii. Exceptions 1. Piercing the Corporate Veil to render shareholders liable. 2. Controlling Shareholders a. Owe a fiduciary duty to minority shareholders, AND b. Liable for selling the corporation to a party who loots the corporation, unless reasonable measures were taken to investigate the buyer’s reputation and plans for the corporation. |
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7. Fundamental Corporate Changes
a. Recognized Fundamental Corporate Changes (MACSD) |
i. Merger (A becomes B)
ii. Amendment of the Articles in a fundamental way. (NOT ministerial) iii. Consolidation (A and B become C) iv. Sale (not purchase) of Substantially all of the Corporation's Assets v. Dissolution (A dissolves) |
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7. Fundamental Corporate Changes
b. Procedural Steps (5 steps) |
1. Majority of ALL shares entitled to vote, AND
2. Majority of any voting group adversely affected by the change separately a. Ex: If amending Articles to eliminate Class A stock - requires majority of all shares and a majority of the Class A stock separately 3. Short Form Merger Exception – No shareholder approval is required for "short-form" merger where a parent corporation that owns 90% or more of the stock in its subsidiary merges with the subsidiary. iv. Dissenters Appraisal Remedy – Shareholder who does not vote for a fundamental change has the right to force the corporation to buy their shares back at fair market value 1. Actions to Perfect the Right a. Written Notice – Before Shareholders vote, file written notice of objection and intent to demand payment b. Adverse Vote – Do not vote in favor of the proposed change c. Written Demand – Make prompt written demand to be bought out 2. Appoint Expert Appraiser – If shareholder and corporation cannot agree on a fair value, court has the power to appoint an expert appraiser to value the shares and that appraisal will be binding on the parties v. File Notice with the State (i.e., Articles of Merger) |
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8. FEDERAL SECURITIES LAWS
a. Anti-Fraud - Section 10(b) of the Securities Exchange Act of 1934 i. Scienter |
– intent to deceive.
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8. FEDERAL SECURITIES LAWS
a. Anti-Fraud - Section 10(b) of the Securities Exchange Act of 1934 ii. Deception |
1. Liar – Material misrepresentation or failure to disclose a material fact in breach of a fiduciary duty, OR
a. Silence absent a duty to speak is not a material misrepresentation. b. Only need to speak when the periodic disclosure is required. 2. Insider Trading – trading on or tipping inside information a. Misappropriator – One who misappropriates (i.e. steals, converts) material nonpublic information and uses it to purchase or sell securities. b. Tipper – One who tips inside information for person benefit to another who trades on it, OR c. Tipee – One who receives inside information and trades on it with knowledge that the information was disclosed in breach of the tipper’s fiduciary duty. |
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8. FEDERAL SECURITIES LAWS
a. Anti-Fraud - Section 10(b) of the Securities Exchange Act of 1934 iii. In connection with the actual Purchase or Sale of securities |
1. Would have, Should have, or could have sold the stock is NOT good enough.
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8. FEDERAL SECURITIES LAWS
a. Anti-Fraud - Section 10(b) of the Securities Exchange Act of 1934 iv. In addition, in private action for damagers, investors must also prove: |
1. Reliance – Investor actually relied on fraud, or invested at a price infected by fraud.
2. Causation – Fraud caused their economic losses |
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8. FEDERAL SECURITIES LAWS
b. Section 16(b) - Short-Swing Trading Profits i. When does 16(b) apply |
1. Reporting Corporations
a. Listed on a national exchange, OR b. At least 500 shareholders AND $10 million in assets 2. Qualified Defendant – Officer, director, of Shareholder with more than 10% 3. Short-Swing Trading – NO buying and selling stock within a single SIX-month period 4. NOTE – FRAUD OR INSIDE TRADING IS NOT REQUIRED. |
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8. FEDERAL SECURITIES LAWS
b. Section 16(b) - Short-Swing Trading Profits ii. Absolute liability |
All "profits" from such "short-swing trading" are recoverable by the corporation.
1. Profits – May either be a gain within 6 months after a purchase or a loss within 6 months after a sale. |
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8. FEDERAL SECURITIES LAWS
c. Sarbanes-Oxley Act of 2002 |
Cannot knowingly make false filings AND cannot benefit during false hoods or black-out periods.
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8. FEDERAL SECURITIES LAWS
c. Sarbanes-Oxley Act of 2002 i. Reporting Corporations |
1. Listed on a national exchange, OR
2. At least 500 shareholders AND $10 million in assets |
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8. FEDERAL SECURITIES LAWS
c. Sarbanes-Oxley Act of 2002 ii. Certify |
CEO & CFO must certify that based on the Officer's Knowledge, the reports filed with SEC:
1. Do not contain material misrepresentations or omissions, and 2. Fairly present the financial position of the company |
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8. FEDERAL SECURITIES LAWS
c. Sarbanes-Oxley Act of 2002 iii. Result |
Willfully certifying a false report could bring:
1. $5 million fine, and 2. 20 years in prison |
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8. FEDERAL SECURITIES LAWS
c. Sarbanes-Oxley Act of 2002 iv. False Hoods |
If false reports have to be restated, the Corporation (directly or derivatively) may recover:
1. Officers' Profits made from trading the company's securities within 12 months after the false reports were filed, AND 2. Officers’ incentive-based compensation received during that period. |
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8. FEDERAL SECURITIES LAWS
c. Sarbanes-Oxley Act of 2002 v. Black-Out |
Corporations (directly or derivatively) may also recover ANY profits made by Officers from trading corporation's stock during "black out" periods of at least 3 days when at least 50% of the employees are prohibited from trading in their retirement plan's securities.
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