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53 Cards in this Set

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  • Back
What are promoters?

When does a corporation become liable for a promoter's pre-incorporation contracts?

When does the liability of the promoter cease?
Persons acting on behalf of a corporation not yet formed.

The corporation becomes liable on promoter's pre-incorporation dealings when it adopts the contract by (1) express board of directors resolution; or (2) implied adoption though knowledge obligations + acceptance of its benefits.

Promoter remains liable on pre-incorporation contracts if corp never forms or until there has been a NOVATION (an agreement between promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract.
Promoters are fiduciaries of...
...each other and the corporation. Therefore, NO secret profits on their dealings with corp.

Corporation may recover any profits that a promoter gained by selling property to the corporation. If property was sold prior to becoming a promoter, corporation can recover only profits above fair market value.
What are subscribers?
They are persons or entities who make written offers to buy stock from a corporation not yet formed.

A subscribers offer to buy stock of a corporation not yet formed is IRREVOCABLE for SIX MONTHS!
An incorporator is a person or entity who...
...merely signs and files the Articles of Incorporation with the state.
What are a corporation's articles of incorporation and what must be included in it?
A document that is filed with the state that contains:

APAIN

(1) Corporation's name, with indicia of corporate status (e.g., Inc.)

(2) Number of shares it is authorized to issue

(3) Name and address of the corporation's registered agent

(4) Name and address of each incorporator

(5) Any other provision regarding operation of the corporation that is not inconsistent with law.

*Adoption of by-laws NOT required in articles of incorporation
(1) What is a "de jure" corporation?

(2) a "de facto" corporation?

(3) a corporation by estoppel?
(1) A corporation that is formed in accordance with law.

(2) A corporation that has failed to achieve de jure status, but has made a colorable attempt at compliance with statutory provisions and exercise of corporate privileges and have no knowledge of lack of corporate status.

(3) Where parties act as if there is a corporation, even when there isn't one. No requirement of following statutory provisions.
What is the consequence when the articles of a corporation state a specific purpose and the corporation later engages is something different that purpose?
(1) State can enjoin the "ultra vires" (beyond the purpose) activity; and

(2) Corporation can recover losses caused by the ultra vires activity from its own directors and officers.
What is the legal significance of formation of a corporation?
(1) A corporation is a separate legal person;

(2) Generally, shareholders are not personally liable for debts of a corporation (but see, piercing the corporate veil).
What is the concept of "piercing the corporate veil, and how can a plaintiff pierce the corporate veil?
It is an exception to the general rule that shareholders are not liable for the debts of a corporation, which is aimed at avoiding fraud and unfairness.

To pierce (only controlling shareholders, NEVER passive investors), must show:

(1) Alter Ego -- failure to observe sufficient corporate formalities;

(2) Undercapitalization Liabilities -- failure to maintain sufficient funds to cover foreseeable debts

*Courts are more willing to pierce for a tort victim than for contract claimant.
An out of state corporation wishing to do business with the state must:
file a certificate of authority with the Secretary of State that includes all the information in its articles of incorporation.
When a corporation sells its own stock, it must receive at least:
"par value", which is the minimum issuance price.

-- "No par" means there is no issuance price and any valid consideration may be received if deemed adequate by the board.

-- Treasury stock is stock that was previously issued and had been reacquired by the corporation. It can then be re-sold.
What are the consequences of issuing par stock for less than par value?
Corporation can recover from (1) its directors for authorizing a below-par issuance and from (2) the purchaser, as shareholders are liable to pay full consideration for their shares.
What are a shareholder's preemptive rights and when does a shareholder have these rights?
They are an existing shareholder's right to maintain her percentage of ownership by buying stock whenever there is a NEW ISSUANCE of stock for cash.

Preemptive rights are NOT implied. They exist only if expressly granted in the corporation's articles.
What are the statutory requirements regarding directors of corporations?
(1) Corporations must have a Board with at least ONE member.

(2) Shareholders elect directors.

(3) Shareholders can remove directors with or without cause.

(4) Valid meeting: (a) meeting is required for all action unless directors consent otherwise; (b) Notice of directors' meeting can be set in bylaws; (c) Proxies, voting agreements not allowed but conference calls valid; (d) Quorum: must have a majority of ALL directors to take action, unless otherwise provided in bylaws); (e) Voting: to pass resolution, only a majority of directors PRESENT is required; (f) Presumption of concurrence unless WRITTEN dissent or abstention.
What is the primary duty of directors of a corporation?
Directors have a duty to manage the corporation, but they may delegate management functions to a committee of one or more directors that recommends action to the Board.
Directors are protected from personal liability for innocent mistakes of business judgment by the...
...Business Judgment Rule, which is a presumption that the directors manage the corporation in good faith and in the best interest of the corporation and its shareholders.

NOTE: Directors are fiduciaries of the corporation, who owe the corporation duties of CARE and LOYALTY.
What is entailed in directors' and officers' duty of CARE?
The director or officer must act with the care that a PRUDENT person would use with regard to her own business, unless the articles have limited director liability for a breach of the duty of care.
What is entailed in directors' and officers' duty of LOYALTY?
A director or officer may not receive an UNFAIR BENEFIT to the detriment of the corporation or its shareholders, unless there has been MATERIAL DISCLOSURE and independent ratification (ratification = [a] majority vote of independent directors OR [b] majority vote of committee of at least 2 independent directors OR [c] majority vote of share held by independent shareholders).

The following is prohibited under the duty of loyalty:
-- Self-dealing
-- Usurping corporate opportunities
What are officers of a corporation?
(1) Officers are agents of the corporation that have the power to bind the corporation by their authorized activities;

(2) They owe a duty of care and loyalty to the corporation and its shareholders;

(3) Corporations must have a President, Secretary, and Treasurer;

(4) Directors have virtually unlimited power to select and remove officers, but the corporation will be liable for breach of contract damages.
Must a corporation indemnify its directors and officers from liability to litigation?
(1) Corporation MUST ALWAYS indemnify (pay for legal costs) if the director or officer won a lawsuit against any party.

(2) Corporation MAY indemnify if: (a) liability to third parties or settlement with the corporation; or (b) director/officer shows that she acted in good faith and believed her conduct was in the corporation's best interest.

Decision to grant indemnity made by: (1) majority of independent directors; (2) committee of 2+ independent directors; (3) majority of independent shareholders; or (4) a special lawyer's recommendation
What is a derivative lawsuit?
A lawsuit where a shareholder(s) brings an action on behalf of the corporation.
What are the requirements to bring a derivative lawsuit?
(1) contemporaneous ownership of corporate stock (at the beginning, during, and end of the lawsuit);

(2) demand Board action + 90 days (or prove futile)
Who has the right to vote at an upcoming shareholders meeting where voting occurs?
Only the owner of the shares ON THE RECORD DATE may vote those shares.

The record date is the voter eligibility cutoff date set by Board on any day within 70 days of meeting.
What is shareholder voting by proxies?
A proxy is writing signed by a record shareholder directed to the secretary of the corporation authorizing another to vote the shares.

Proxies are:

(1) VALID for 11 months.
(2) Revocable, unless specifically irrevocable or coupled with consideration
Where do shareholders vote?
(1) At a properly noticed (time +place) annual meeting, where at least one director slot is open for election; OR

(2) Specially noticed special meeting -- called by Board, President, or holders of 10% of voting shares)
-- Meeting to vote on proposals or fundamental corporate changes.
--Notice must contain the SPECIAL PURPOSE of the meeting.
--No other matters discussed or voted on at this meeting.

**Quorum must be represented at all meetings.
What is a quorum?
A majority of shares (not shareholders). A quorum must be present at all shareholder meetings.
How does shareholder voting work?
If a quorum is present, action is approved if the votes cast in favor of a proposal exceed the votes cast against (abstentions not factored in).
What is pooled or block voting?
Methods of aggregating votes (voting alike) in order to increase influence by shareholders who own relatively few voting shares.

Methods include:

(1) VOTING TRUSTS: Formal delegation of voting power to a voting trustee.
-- Requirements: (i) written trust agreement; (ii) typically filed with corporation; (iii) transfer shares to voting trustee; (iv) shareholders get trust certificates; (v) shareholders retain all other rights, except for voting; (vi) duration is generally 10 years.

(2) SHAREHOLDER VOTING AGREEMENTS -- written agreement to vote shares as required by the agreement. They are binding on all signors.
What is cumulative voting for directors vs. straight voting?
Under traditional straight voting (default), if there are 5 open director slots, there are 5 separate elections, and each shareholder may vote all his shares in each election.

Under cumulative voting (which must be expressly permitted in articles), if there are 5 slots open, there is only ONE election, and shareholder may pool his votes behind one candidate. The top 5 vote receivers are elected.
Does a shareholder have the right to examine the books and records of a corporation?
Yes. ANY shareholder shall have access upon notice and at proper times.
How is the decision whether to distribute dividends made?
Board has exclusive discretion unless the corporation is insolvent or would be rendered insolvent by the dividend.

Board members are personally liable for unlawful distributions, but may assert defense of good faith reliance on financial officer's representations about solvency.
What is the priority of distribution when a corporation distributes dividends?
Preferred shares get paid first and Common shares get paid last (and split equally).

"Preferred participating" means a shareholder that owns both preferred and common stock. His preferred stocks will pay out first and his common stock will be paid last (split among other common stockholders).

"Preferred cumulative" means preferred shares are cumulative (no dividends paid out in prior years). These shares are paid out the same as preferred but multiplied by the number of years without dividend payment.
What is an S-Corporation and what are its advantages?
They are closely-held corporations that have eliminated corporate formalities by: (1) unanimous shareholder election evidenced in articles, bylaws, or filed written agreement; and (2) reasonable share transfer restriction (no public trading).

Consequences:
(1) no piercing corporate veil;
(2) Sub-chapter S favorable tax treatment.

S-Corporation Additional Requirements:
(1) no more than 100 shareholders
(2) no more than one class of stock
What is a professional corporation and what are its advantages?
Licensed professionals that incorporate.

Requirements:
(1) Organizers file articles with name designated "Professional Corporation" or "PC".
(2) shareholders must be licensed professionals in ONE designated profession
(3) professionals are personally liable for their own malpractice, but NOT for each others or the corporation's liability.
What are the liabilities of shareholders?
General rule: shareholders are not liable.

Except:

(1) Piercing Corporate Veil to render shareholder liable;
(2) In CA: controlling shareholders owe a fiduciary duty to minority shareholders; and
(3) In CA: controlling shareholders are liable for selling corporation to a party who loots the corporation, unless reasonable measures were taken to investigate buyer's reputation and plans for the corporation.
What is a fundamental corporate changes and what are some examples?
Fundamental (not ministerial) amendment of the articles; Sale (not purchase) of substantially all of the corporation's assets.

Example:
(1) Merger
(2) Consolidation
(3) Dissolution
What are the procedural requirements for a corporation to undertake a Fundamental Corporate Change?
(1) Resolution by Board at a valid meeting;
(2) Notice of special meeting;
(3) Approval by majority of all shares entitled to vote, AND by a majority of any voting group that is adversely affected by proposed change.
(4) Possibility of dissenting shareholder RIGHT OF APPRAISAL
-- shareholder who does not vote in favor of fundamental change has right to force the corporation to BUY her shares at fair value
-- To exercise this right, shareholder must: (i) before vote, file written notice of objection and intent to demand payment; (ii) do not vote in favor of change; (iii) make prompt written demand to be bought out.

If corporation and shareholder can't agree to a value, court will appoint an expert appraiser to value shares, which will be binding on parties.

(5) File notice with state (articles of merger)
What are the essential elements of a 10(b) anti-fraud securities action?
(1) Intent to deceive + (2) Deception + (3) in connection with purchase/sale of securities (stocks).
**a private investor suing for damages must also prove (4) Reliance and (5) Loss Causation.

DECEPTION:

(1) LYING (i) misrepresentation of material fact, or (ii) failure to disclose a material fact in breach of a fiduciary duty to disclose.

(2) INSIDER TRADING:

(i) Misappropriator -- one who misappropriates material nonpublic information and uses it to purchase or sell securities;

(ii) Tipper -- one who tips inside information for personal benefit to another who trades on it; or

(iii) Tippee -- one who receives inside information and trades on it with knowledge that the information was disclosed in breach of tipper's fiduciary duty.
What is a 16(b) securities action?
16(b) deals with "short-swing" trading profits. Involves buying and selling stock within a single six-month period.
-- Fraud NOT required
-- Inside information NOT required

Applicable to:

(1) Big corporations (Reporting Corporation) -- (1) listed on national exchange or (2) at least 500 shareholders and $10 million assets

AND

(2) Big shot defendant -- officer, director, shareholder that owns 10% or more.

Consequence when 16(b) applies: all "profits" from short-swing trading are recoverable by the corporation. If, within six months before or after any sale, there was a purchase at a lower price than the sale price, there is a profit.
Who does the Sarbanes-Oxley Act of 2002 apply to?
It applies to Reporting Corporations (the big ones).

Requirements:
(1) CEO and CFO must certify that based on the Officer's knowledge, reports filed with the SEC:
(i) do not contain material misrepresentations or omissions; and;
(ii) fairly present the financial position of the company.

Consequences:
(1) Willfully certifying a false report could bring $5 million fine and 20 years in prison;

(2) Civil liability: corporatoin may recover Officer's profits made from trading the company's securities within 12 months after the false report was filed, and may recover incentive based compensation.

(3) Corporations 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.
What is the SEC 10b-5 Rule concerning misrepresentation ?
Must prove a material misrepresentation through an instrumentality in interstate commerce in connection with the purchase or sale of any security.

Requirements: "My Knowledge Is Actual"

(1) misrepresentation
(2) knowledge of falsity (or reckless)
(3) intent to induce purchase/sale of securities
(4) actual reliance
May a shareholder bring a direct action (on behalf of himself) against a corporation or its directors?
Only if the shareholder's claim involves a breach of fiduciary duty owed to him as a SHAREHOLDER (distinguish between duty owed to corporation -- which requires derivative lawsuit).

A duty is owed to the shareholder (not the corporation) when: (i) shareholder suffers most immediate and direct damage; and (ii) defendant's duty ran to shareholder
What is the doctrine of waste as applied to directors?
Directors have a duty not to waste corporate assets by overpaying for property or services.
When a decision by an officer or director is challenged, the burden is on the...
...challenger to prove that director or officer did not meet the standard of care (good faith + prudent person + best interests of corp). This is known at common law as the "business judgment rule."
When is a corporation allowed to redeem (repurchase) shares of its own stock?
Traditionally, redemption was only permitted when corporation purchases shares with earned surplus. This rule is no longer applicable. A corporation may repurchase its stock according to its articles so long as it is NOT INSOLVENT.
When can the state bring an action to administratively dissolve a corporation?
(1) failure to pay fees or penalties
(2) failure to deliver the annual report
(3) failure to maintain a registered agent
(4) failure to notify state of a change in registered agent
(5) expiration of period of corporate duration set forth in articles

A corporation that is administratively dissolved may apply for reinstatement within two years.
Who may seek judicial dissolution of a corporation?
(1) Attorney General, if corporation fraudulently obtained articles, or if corporation is exceeding or abusing its authority.

(2) Action by Shareholders, for one of the following reasons: (i) directors are deadlocked, and irreparable injury is threatened due to deadlock; (ii) directors have acted in illegal, oppressive, fraudulent manner; (iii) shareholders are deadlocked and failed to elect director for two annual meetings or more; (iv) corporate assets are being wasted for non-corporate purposes.

(3) Action by creditors

(4) Corporation itself (voluntary)
Where shareholders are held liable (after PCV), each is liable for:
the entire amount of the claim (joint and several liability).
Directors who make a decision that, in hindsight, turns out to be poor or erroneous are:
protected by the business judgment rule, and are not held personally liable, so long as they acted in good faith and exercised due caution.

However, this presumption CAN be overcome by a challenger.
A director is entitled to rely on and base his business judgment on information, opinions, or statements if they are:
prepared by corporate officers or employees whom the director believes to be reliable and competent.
What are the special rules regarding controlling shareholders?
They must refrain from using their control to obtain a special advantage or to cause the corporation to take action that unfairly prejudices minority shareholders.
Is it permissible for a controlling shareholder to sell his shares at a price unavailable to other shareholders, when the price received is attributable solely to the right to control the corporation?
No case has ever held this impermissible; however shareholders may not illegally sell corporate assets for their own benefit (control hasn't been ruled a corporate asset).
What is Securities Act, Section 16(b)?
Provides that any profit realized by a director, officer, or ten percent shareholder from any purchase and sale, or sale and purchase, of any equity security of his corporation within a period of less than 6 months must be returned to the corporation.