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65 Cards in this Set

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What is the process for forming a corporation?
The incorporator files the articles of incorporation with the Ohio Secretary of State, along w/ written appointment of statutory agent signed by the incorporators and the agent. A filing fee must also be paid. The corporation is formed when the Secretary of State accepts the articles of incorporation. (this is conclusive proof of forming a de jure corporation)
Then, incorporators call a meeting of shareholders, who elect the directors and adopt initial regulations.
What information is included in the articles of incorporation?
1. Names and adresses -- corporate name (including "corporation, Company, or incorporated [inc., corp. co.)] and principal ohio office address.
2. Purpose and duration of corp. -- perpetual duration presumed if articles are silent
3. Capital structure -- authorized stock, number of shares per class and info on par value, voting rights and preferences of each class.

Also, initial stated capital, if any.
What are the elements of the De facto corporation doctrine?
1. there is a relevant incorporation statute.
2. the parties made a good faith, colorable compliance with the statute, and
3. some exercise of corporate privileges.
If these are met, the court will treat as "de facto corporation" , preventing the liability of individual proprietors, except in an action quo warranto by the state.
What is a corporation by estoppel?
Under the doctrine of corporation by estoppel, one dealing w/a business as a corporation, treating it as a corporation, may be estopped from denying the business's corporate status.
Who is a promoter? What is the significance of being a promoter?
A promoter is a person acting on behalf of a corporation not yet formed. She participates in forming the corporation and getting it ready to transact business. Generally, unless the K expressly provides otherwise, the promoter remains liable on the pre-incorporation K's until there has been a novation (agreement between the corp, promoter, and third party that the corporation will replace the promoter. corporation can expressly or impliedly -- by accepting a benefit of the K --adopt a promoter's pre-inc. K, but the promoter remains liable w/out a novation.
What is the "secret profit rule?"
The secret profit rule is that the promoter cannot make a secret profit on her dealings with the corporation. Profit= price paid by corporation - FMV (for property acquired before becoming promoter.) profit= corporation price - price paid by promoter for post-promoter purchases.
What is an issuance?
An issuance of stock occurs wen a corporation sells or trades its own stock. It is a way for the corporation to raise capital. Whether to issue stock is a Board decision.
What is a subscription?

When is a subscription revocable?
When does the corp./ subscriber become obligated under a subscription agreement?
A subscription is a written offer to buy stock.

A subscription is revocable until acceptance.

When the Bd. accepts the offer.
What forms of consideration are valid for an issuance?

What forms of consideration are prohibited?
1. money 2. property of any description 3.services already performed for the corporation.

1. Promissory notes 2. future services
What is par value of stock?
Par means "minimum issuance price" of stock. Par stock is not required.
What is treasury stock?
Treasury stock is stock that was previously issued and has been reacquired by the corporation. The corporation can resell the stock. Treasury stock is always treated as having no par value (no minimum at which treasury stock may be sold).
What are the consequences of issuing stock for below its par value-- watered stock?
1. Directors are liable for watered stock if they authorized its issuance.
2. the purchaser of watered stock is also liable
3. Third party transferee of watered stock is not liable if she acted in good faith(did not know the stock was "watered stock"
what are preemptive rights?
Preemptive rights are rights of existing shareholders of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of common stock for money, not including the sale of treasury stock.
If the articles of inc. are silent, do the shareholders have preemptive rights?
If corp. was formed before March 17,2000 yes.

If corp. was formed after, no.
What number of directors is required?
Directors must be adult natural persons.
1 shareholder -- must be at least one director.
2 shareholders -- at least 2 directors
3 or more shareholders -- at least 3 directors
When are directors elected?
Directors are elected by the shareholders at the annual meeting. The Bd. may be staggered into 2 or 3 classes; the directors' terms need not be uniform, but no term may exceed 3 years.
How may directors be removed?
1) by expiration of the director's term, or by majority vote of shares entitled to vote-- with or w/out cause.
Who selects the person to fill a vacancy on the Bd?
Majority vote of the remaining directors, unless the articles or regulations provide otherwise, unless the vacancy was created by the shareholders' removing a dir., then the shareholders elect the replacement.
How does the Bd of Dir. take action?
There are two ways a bd of dir. can take a valid act:1. unanimous written and signed consent to act w/out a meeting, or 2. a meeting that satisfies quorum and voting rules. If neither is met, any act is void unless it is ratified by a valid corporate act.
1. Notice - written notice at least 2 days before the meeting. Failure to give might be waivable in writing or by attending w/out objection
Quorum -- must have a majority of all directors to do business (unless more are required by articles or regulations)
May a director vote by proxy or voting agreement?
NO. Directors may not vote by proxy or voting agreement.
What is the director's duty of care?
A director must act in good faith w/ the reasonable belief that her acts are in the corporation's best interest and must exercise the skill and care that an ordinarily prudent person would use in a like position. (burden on the plaintiff)
What is the rule for nonfeasance of a director?
(State standard of care.) But, the director is only liable for misfeasance if his breach caused a loss to the corporation.
When is the director liable for misfeasance?
(state the standard of care). But, the director is not liable if she meets the business judgment rule. Under the BJR, a court will not second guess a managment decision if it was made in good faith, was informed, and had a rational basis. Directors in Ohio are only liable for breach of duty of care if there is clear and convincing evidence that they failed to meet the standard.
What is the rule for director liability in an interested director transaction?
(Standard of care). An interested director transaction will be set aside unless the director shows: 1. it was fair to the corporation when entered or 2. her interest and the relevant facts were disclosed or known and the deal was approved by either : a) a majority of the disinterested directors or b) majority of the disinterested shares.
What is the rule for director liability under the duty of loyalty when the director is involved in competing ventures?
(Standard of care). A director cannot compete directly w/ the corporation. IF she does, her profits will be placed in a constructive trust for the corporation.
What is the rule for liability of a director under the corporate opportunity or "business opportunity" rule for duty of loyalty?
(Standard of care) Director cannot usurp a corporate opportunity. That means the director cannot take it until he 1. tells the board and 2. waits for the bd to reject the opportunity. and 3. he must vote in favor of having the corporation accept it.

Something is a corporate opportunity if it is something the corp. has an interest or expectation in or is in the corp's general line of business.
Which directors are liable for the various things directors get in trouble for?
A director is presumed to have concurred w/ Bd action unless her dissent is noted in writing in the corporate records, either the minutes or in writing to the corporate secretary at the meeting, or in writing to the corporate secretary w/in a reasonable time after the meeting. Cannot dissent if voted for the resolution at the meeting. Absent directors are not liable, nor is a director who relies in good faith upon the information, etc prepared or presented by a committee, professional, director or officer reasonably believed to be competent on the matter.
Who is liable for ultra vires acts?
Responsible officers and directors are liable for ultra vires losses.
When is a loan to a director by the corporation proper?
A loan to a director by the corporation is ok if it is approved by a a majority of disinterested directors and they determine that the loan is reasonably expected to benefit the corporation.
What corporate officers are required?
1. President
2. Secretary
3. Treasurer
Can have others. Chairperson of the board must be a director. No other officer need be a director.
Who selects and removes officers?

Who sets officer compensation?
Officers are selcted by and removed by directors.

Directors set officer compensation.
When is a corporation barred from indemnifying a person sued in their capacity as officer and director?

Who must the corporation indemnify?

Permissive indemnification, see page 15 of lecture handout.
If the person is held liable to the corporation for negligence or misconduct in performing a duty to the corporation

The corporation is required to indemnify an officer or director sued in their capacity as o/d to the extent they are successful, on the merits or otherwise, in defending the suit.
What is the standard for piercing the corporate veil?
Generally, a shareholder is not liable for the acts or debts of a corporation. But a court might "PCV" and hold shareholders personally liable if they have abused the privilege of incorporating (fraud/excessive domination) and fairness requires PCV to avoid fraud or injustice from shareholder acts. For the shareholder's domination to be "excessive" the corporation must be so controlled that the corporation has no will of its own apart from the shareholder.
What is a shareholder derivative suit? Who may bring a shareholder derivative suit?
1. In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim.
2. Requirements: a)Stock ownership at the time the claime arose or ownership by operation of law from someone who owned the stock at the time the claim arose.
2. Representation-P shareholder must fairly and adequately represent the interests of the shareholders
3. Written demand on the directors that the corporation bring suit, unless the demand would be futile.
4. Shareholder must file verified complaint (under oath), and must plead w/ particularity efforts made, if any, to have the corporation bring suit, or why demand was excused.
6. Disinterested directors can move to dismis the derivative suit if they find it is not i the corporation's best interest.

In the litigation, the coproation must be joined as a defendant. The case may not be dismissed or settled w/out court approval. Notice of porposed dismissal or settlement shall be given to shareholders in a manner directed by the court.
Who votes?
Record shareholder -- person shown as the owner in the corporate records-- as of record date has right to vote.
What is a proxy?

How long is a proxy good for?
A proxy is a 1) writing (ok if creates record capable of authentication 2) signed by record shareholder 3) directed to secretary of corporation 4) authorizing another to vote the shares.

A proxy is good for 11 months unless it says otherwise.
How can a proxy be revoked?
1. Written revocation to the secretary of the corporation.
2. Showing up at the meeting , and orally stating intent to vote.
When are proxies irrevocable?
Proxies are irrevocable when coupled w/ an interest (ie, ownership.)
What are the requirements for a voting trust?
1. 10 year maximum
2. Written trust agreement controlling how shares will be voted
3. copy to corporation
4. transfer legal title of shares to voting trustee
5. original shareholders receive trust certificates and retain all shareholder rights except for voting and except for inspection of corporate records.
What are the requirements for a voting agreement?

What damages are available?
1. A contract

2. No specific performance, can only sue for damages.
What are the ways that shareholders can take a valid corporate act?
1. unanimous written and signed consent of holders of all voting shares, or 2. a meeting per quorum and voting rules. Meetings can be anywhere
What can a shareholder do if no annual shareholder meeting is held?
The shareholder can petition the court to order a shareholder meeting. (Annual meeting is where shareholders elect directors)
Who can call a special meeting?
1. Board or chairperson
2. the president
3. the holders of at least 25 percent of the voting shares, or
4. SOmeone else as provided in the articles or regulations.
The person calling a special meeting must ask the corp. secretary to give proper notice. IF the secretary fails to do so, they person calling the meeting may give notice.
What notice is required for a shareholder meeting?
Must give written notice to every shareholder entitlted to vote for every meeting (annual or special), delivered 7 to 60 days before the meeting. Notice may be delivered personally or by mail or overnight delivery or other means of communication (email) authorized by the shareholder. The notice must state: when and where and purpose of the meeting. The stated purpose limits what business can be transacted at that meeting.
What is the consequence of failure to give proper notice to all shareholders?
Action taken at the meeting is void unless those not sent notice waive the notice defect by either :
1) Express waiver - in writing and signed (any time)
2)Implied - attending the meeting without objecting at the outset.
How do shareholders vote?
There must be a quorum represented at the meeting. In Ohio, a quorum is the number of shares present, unless otherwise established in the articles or regulations.
If a quorum is present, a majority may act to bind the corporation unless the art. or regs. require a higher vote.
How and when do shareholders use cumulative voting?
1. Cumulative voting is only availabe in voting for directors.
2. Multiply the number of shares times the number of directors to be elected.

If articles are silent on cumulative voting, shareholders may vote cumulatively. Cumulative voting may be removed 90 days or more after formation.
If cumulative voting is in effect, at least one shareholder must give written notice to the corporation of her intent to cumulate not later than 48 hours before the meeting.
When is a stock transfer restriction valid?
Stock transfer restrictions will be upheld provided that they are reasonable under the circumstances, ie, not an undue restraint on alienation. The right of first refusal is OK, assuming the corporation offers a reasonable price.
When can a stock transfer restriction be invoked against the transferee?
A stock transfer restriction cannot be invoked against the transferee unless it is conspicuously noted on the certificate or the transferee had actual knowledge of the restriction.
right to inspect/ copy the books and records of the corporation?
Any shareholder can demand access to the articles, reulations, books, and records of account, minutes, shareholder lists and voting trusts. To do so the shareholder must make a written demand stating a proper purpose (related to one's interest as shareholder). May inspect in person or by agent or attorney at any reasonable time.
How are distributions declared?
Distributions are declared in the Board's discretion. Actions to compel declaration of a distribution are tough to win; must show fraud or a very strong abuse of discretion. See page 24 of handout for distribution problems.
Distriutions can come from earned surplus, or capital surplus (<-- with notice to shareholders)
When may a corporation make a distribution?
Distributions are made at the board's discretion. Corporation may make a distribution even though it lost money last year. However, a corporation cannot make a distribution if it is insolvent, or if the distribution would render the corporation insolvent (unable to pay debts as they come due).
Who is liable for an unlawful distribution?
Directors are personally liable for unlawful distriubtions to the extent they exceed what was properly payable, as are shareholders who knew the distribution was unlawful when htye received it. Directors have a possible defense of good faith reliance.
What are the characteristics of fundamental corporate change?
1. unusual occurrences, requiring bd action and
2. approval by 2/3 of the shares entitled to vote (articles can move this up or down but no fewer than a majority.)
3. Possibility of dissenting shareholder right of appraisal.
What is a right of appraisal?

When will a shareholder have a dissenting shareholder right of appraisal?
1. A right of appraisal is the right of a shareholder to force the corporation to buy her shares at fair value.
2. Actions by the corporation trigger the right of appraisal:
1. certain amendments to articles.
2. merger or consolidation
3. disposition of entire assets not in the ordinary course of business.
How does the shareholder perfect the right to appraisal?
1. Shareholder must be a shareholder entitled to notice; and
2 within 10 days after the fundamental change is approved, the shareholder must make written demand to the corporation to be bought out. The demand state shareholder's name and address, number of shares held on record date, and price demanded.

If the shareholder and the corporation cannot agree on fair value of the shares, the corporation or shareholder will sue in the court of common pleas.
What are the characteristics of fundamental corporate change?
1. unusual occurrences, requiring bd action and
2. approval by 2/3 of the shares entitled to vote (articles can move this up or down but no fewer than a majority.)
3. Possibility of dissenting shareholder right of appraisal.
What is a right of appraisal?

When will a shareholder have a dissenting shareholder right of appraisal?
1. A right of appraisal is the right of a shareholder to force the corporation to buy her shares at fair value.
2. Actions by the corporation trigger the right of appraisal:
1. certain amendments to articles.
2. merger or consolidation
3. disposition of entire assets not in the ordinary course of business.
How does the shareholder perfect the right to appraisal?
1. Shareholder must be a shareholder entitled to notice; and
2 within 10 days after the fundamental change is approved, the shareholder must make written demand to the corporation to be bought out. The demand state shareholder's name and address, number of shares held on record date, and price demanded.

If the shareholder and the corporation cannot agree on fair value of the shares, the corporation or shareholder will sue in the court of common pleas.
What is required for amendment of the articles?
1. Bd of director action and notice to shareholders, and
2. shareholder approval (2/3 of shares entitled to vote)
3. If approved, amended articles filed with secreatry of state.
4. dissenting shareholders have right of appraisal if the amendment hurts the shareholder by changing a preference or other term of his stock.
What is required for a corporate merger or consolidation?
1. Bd. of director action and notice to shareholders
2. Shareholder approval of the disappearing companies. (it is only a fundamental corporate chcange for the corporations that disappear. Approval must be 2/3 of shares entitled to vote, and the shareholders of the surviving compnay inia merger must approve the deal only if consummation of the merger will result in one-sixth or more of the voting shares of the survivor going to shareholders of the disappearing company.
3. No shareholder approvl is required in a "short form" merger, where a 90% or more owned subsidiary is merged into a parent corporation.
44. If approved, filed certificate of merger/ consolidation with Secretary of state.
5. Dissenting shareholders have right of appraisal (corporation that disappears.)
6. The surviving company suceeds to all rights and liabilities of the constituent companies.
What is required for the disposition of entire or substantially all assets not in the ordinary course of business?
1. Board of dir. action (both companies) and notice to shareholders of the selling corporation.
2. approval by the selling corporation's shareholders -- 2/3 shares entitled to vote.
3. right of appraisal -- dissenting shareholders
What is required for voluntary dissolution?
1. a.Voluntary dissolution: approval of 2/3 shares entitled to vote.
b. Bd of drector action if bankrupt or if articles cancelled for failure to pay taxes, assets sold at judicial sale, or duration of corporate existence expired.
c. file certificate of dissolution and give notice to creditors. Directors then wind up affairs.
What is rule 10b-5?
Under rule 10b-5, it is unlawful for any person, directly or indirectly, by use of anymeans or instrumentality of interstate commerce or the mails, or of any facility of any national securities exchange to 1. employ anydevice, scheme or facility or artifice to defraud; 2. make any untrue statement of a material fact or make a material ommission, or to engage in any act, praactice or course of business that operates or would operate as a fraud or a deceit upon any person, n connection w/ the purchase or sale of any security.
How may a unilateral contract be accepted?
A unilateral contract is accepted by completion of the specified act. The offeree must act w/ knowledge of the offer and be motivated by it.