Corporations - Texas Bar Exam 2010

Front 1

Corporation - General Characteristics

Back 1

Legal entity distinct from its owners and may be created only by filing certain documents within the state

Corporation has:
1. limited liability for owners, directors, officers
2. centralized management
3. free transferability of ownership
4. perpetual lifespan unaffected by change in ownership

Front 2

Formation Requirements

Back 2

Organizers (persons who undertake to form corp) must file the Certificate of Formation with the Secretary of State; must include names and addresses, statement of purpose, capital structure (stock)

De jure corporation is formed in accordance with state law (corporation in the eyes of the law) by filing

If defect in incorporation process, may still be limitation on personal liability under de facto corporation doctrine - requires a good faith attempt to comply with incorporation law and an act in the corporate name (main issue usually good faith)

Corporation by estoppel bars person who dealt with what she believed to be a corporation from holding owners personally liable

Front 3

Ultra Vires

Back 3

refers to an act outside the scope of the purpose clause in corporation's certificate of formation; may also refer to an act beyond the authority of corporate directors and officers

rarely a problem because corporations typically have broad purpose clauses in their certificates of formation ("all lawful business" clause) and TBOC does away with the ultra vires doctrine except in very limited circumstances

Front 4

Assumed Name Statute

Back 4

if event occurs that causes info in an assumed name certificate to become materially misleading (including a change in the form of the business), new certificate must be filed within 60 days; failure doesn't impair the validity of any K, but bars a person from bringing suit in a Texas court on a K in which an assumed name was used until a new certificate is filed (defending a suit is permitted)

Front 5

Taxation

Back 5

Fact that corp pays income tax means there's "double taxation" - income paid by entity and by shareholders on their dividends (can avoid tax of corporation by forming an S Corporation - 100 or fewer shareholders, all shareholders are human, only one class of stock, which is not publicly traded)

Front 6

Bylaws

Back 6

Not a condition precedent to formation but virtually every corp has them; they are for internal governance; adopted by Board of Directors at organizational meeting; can be amended by Board or SH; if bylaws conflict with certificate of formation, certificate of formation takes precedence but bylaws can change the number of directors

Front 7

Pre-Incorporation Ks

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Promoter = person acting on behalf of corp not yet formed

Corp not liable on pre-incorporation Ks until it adopts the K; adoption can be express or implied if corp accepts a benefit of the K (ex. using leased space)

Promoter remains liable on pre-incorporation Ks until there has been a novation (an agreement of promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract

Front 8

Foreign Corporations

Back 8

Foreign corps transacting business (intrastate transactions on a recurring basis - regular course of business) in Texas must qualify and pay prescribed fees; qualify by getting certificate of authority from Texas Secretary of State (failure to qualify results in civil fine and barred from suing n Texas on claim arising from business in Texas)

Front 9

Issuance

Back 9

occurs when corporation sells its own stock; it is a way to raise capital

Front 10

Subscriptions

Back 10

Promises from subscribers to buy stock in the corporation are called "subscription agreements" - subscription agreements are solicited prior to incorporation (to be accepted when the corporation is formed); they can also be used by existing corporations to sell new issues of stock; subscription is an offer addressed to the corporation to purchase shares, and it doesn't become an enforceable K until corporation accepts the offer

Subscription agreement is a continuing offer that doesn't become an enforceable K until accepted by the corporation

Subscription is irrevocable for 6 months; corp may accept a subscription by notifying the subscriber in writing

Front 11

Consideration

Back 11

Form permitted - any tangible or intangible benefit to the corporation (money, discharge of debt, property, services already rendered)

Amount of Consideration - par means minimum issuance price (par stock is not required; if we have it, it is set in the certificate)

No par means no minimum issuance price; board can set any price

Front 12

Treasury Stock

Back 12

Previously issued and has been reacquired by the corporation; it is authorized and unissued (so company can resell it) ; treat treasury stock as no par

Front 13

Preemptive Rights

Back 13

Allow SH maintain her proportionate interest in a corporation by buying a proportionate number of newly issued shares

When examining whether SHs in a Texas corp have preemptive rights, look at the date of the corporation's formation:
-Shs in a TX corp formed on or before 9/1/2003, don't have preemptive rights except to the extent provided in the corporation's certificate of formation
-Shs of a TX corp formed before 9/1/2003, have preemptive rights; however, even when SHs have preemptive rights, the rights don't apply when newly issued shares are sold unless the certificate of formation specifically provides otherwise

Front 14

Directors - Statutory Requirements

Back 14

One or more adult natural persons; number set in certificate (later bylaws)

SHs elect directors at annual meeting and may remove them with or without cause by vote of a majority of the shares entitled to vote

If director resigns (vacancy on board), either SHs or Board selects person to serve remainder of term

Front 15

How Board of Directors Takes Action

Back 15

1. Unanimous written consent (email and fax are okay) to do something or
2. Meeting that satisfies quorum and voting requirements

If directors act through individual conversations or without a meeting or unanimous consent, that act is void unless ratified by a valid act

Front 16

Notice of Board Meetings

Back 16

Regular meetings: notice not required

Special meetings: notice required; must state time and place of meeting; failure to give proper notice voids whatever was done at meeting unless defect is waived by the person not notified; method of giving notice set in bylaws

No proxy voting; no voting agreements

Front 17

Quorum - Directors Meeting

Back 17

To do business at meeting, must have majority of all directors (unless different % required in certificate or bylaws)

If quorum, passing resolution requires only a majority vote of those present

Statute suggests that once quorum is lost (director leaves meeting), Board cannot take an act at that meeting

Front 18

Role of Directors

Back 18

1. Manage business of corporation - set policy, supervise officers, declare distributions, decide when corporation should issue stock, recommend corporate changes to SHs
2. Exceptions:
a. close corporations
b. shareholder agreement
c. committee of one or more directors (if certificate/bylaws allow, board can appoint committee and delegate substantial management power to it - but committee cannot amend bylaws, select officers or recommend fundamental corporate changes to SHs)

Front 19

Board of Directors - Duty of Care (Burden on Plaintiff)

Back 19

Duty of Care Standard: Director owes the corporation a duty of care. He must act in good faith and exercise ordinary care and prudence. he must do what a prudent person would do in similar circumstances.

Becomes an issue with:
1. nonfeasance (laziness - director does nothing) BUT he is liable only if his breach caused a loss to the corporation (though to show causation because corp prob would have lost money anyway)
2.misfeasance (goofiness - director does something that hurts corporation) BUT director not liable if he meets the business judgment rule (court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis - director is not a guarantor of success)

Front 20

Board of Directors - Duty of Loyalty (Burden on Defendant)

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Duty of Loyalty Standard: Director owes corporation duty of loyalty. He must act in good faith and with a reasonable belief that what he does is in the corporation's best interest.

These issues involve potential conflicts of interest so burden on defendant

Front 21

Interested Director Transaction

Back 21

State Duty of Loyalty; then ...

Interested director transaction will be set aside unless director shows:
1. deal was fair to the corp when approved; or
2. his interest and the material facts where disclosed or known and the deal was approved in good faith by either:
a. shareholders
b. majority of disinterested directors

Interested directors count toward quorum

Board can set its own compensation as long as it is reasonable; if pay excessive, it is a waste of corp assets and breach of duty of loyalty

Front 22

Competing Venture

Back 22

State Duty of Loyalty; then ...

Director cannot compete without approval by disinterested directors

Remedy: constructive trust on profits

Front 23

Corporate Opportunity

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State Loyalty Standard; then ...

Director cannot USURP a corporate opportunity. That means director cannot take it until he:
1. tells the board and
2. waits for the board to reject the opportunity

Corporate opportunity = anything director has reason to know that the corporation would be interested in

Corp can renounce opportunity in certificate of formation or by board action - clears way for director to take advantage of the opportunity

Front 24

Other bases of Director Liability

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1. Ultra vires acts
2. Improper loans - can only make loans if reasonably expected to benefit the corporation
3. Improper distributions

Director is presumed to have concurred with Board action unless his dissent/abstention is noted in writing in corporate records:
1. having it put in the minutes
2. sending note to corporate secretary at meeting
3. sending registered letter to corporate secretary immediately after meeting
4. oral dissent ineffective by itself
Exceptions:
1. absent directors not liable
2. good faith reliance on financial statements or info represented as correct by officer or competent professional (accountant)

Front 25

Officers

Back 25

-Owe same duties of care and loyalty as directors
-Status: officers are agents of the corporation so they bind corp by acts within their authority; president ha authority to convey corp real property only if Board gives him such authority - he might have inherent authority to bind corp to a K entered into in ordinary course of business
-Must have president and secretary; one person can hold all offices
-Officers selected/removed by directors (also set compensation)
-Note: SHs hire/fire directors; directors hire/fire officers; SHs do NOT hire/fire officers

Front 26

Indemnification of Directors and Officers (when sued in capacity as director or officer)

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Reimbursement prohibited if director/officer held liable for willful/intentional misconduct in performing duty to corp

Reimbursement required if director or officers wins judgment on the entire case (must pay litigation expenses)

Reimbursement permitted in all other situations (ex. settlement); must show director/officer acted in good faith and with reasonable belief actions were in corp's best interests; eligibility determined by majority vote of disinterested directors or independent legal counsel

Certificate can limit/eliminate director/officer liability for damages, but never for willful or intentional misconduct

Front 27

Close Corporations

Back 27

Generally, SHs don't manage corp (directors do), but in close corp, SHs can manage (or particular person can)

Close corp = few shareholders and stock is not public traded

Management structure changed in the shareholders' agreement (abolishing Board of Directors)

Stock certificates should note close corp status and that SHs manage (failure won't affect status)

Once corp starts operating under SHs' agreement, it files statement of operation as close corp with Sec of State - if filing made, agreement binding on all SHs and transferees (even if transferee doesn't have knowledge of agreement)

Front 28

Shareholder Duties

Back 28

in close corp, managing SHs owe corp the duties of care and loyalty

in TX close corp, SHs do not owe each other fiduciary duties as a matter of law; but court may find fiduciary duty depending on facts of case - watch for controlling SH oppressing minority SHs by:
1. freezing out minority SHs
2. selling control (w/out reasonable investigation) to one who loots corp
3. selling corp asset

Any oppression of minority of SHs or corp, make argument that fiduciary duty exists and has been breached

Front 29

Shareholder Liability

Back 29

generally, SHs not liable for acts or debts of corp (corp is liable for what it does)

BUT court might pierce corp veil and hold SHs personally liable if:
1. they have abused privilege of incorporating and
2. fairness requires SHs be liable (court may PCV to prevent fraud or achieve equity)

PCV happens only in close corps; PCV is never automatic

Front 30

Piercing Corporate Veil

Back 30

PCV - SH assets reached if:
1. corporate formalities have been ignored (SH treats corp as his alter ego, using its assets as his own, parent cor and subsidiary share same directors, employees, and facilities) and a basic injustice will result because of the lack of formality
2. corp was under-capitalized at the outset (investors didn't' start corp with sufficient capital to meet its prospective liabilities)
3. corp was formed to perpetuate a fraud (avoid existing obligations)

Generally, if corp veil is pierced, courts hold liable only persons who actively participated in the wrongdoing; inactive SHs generally not liable

TX courts generally may be more willing to PCV for tort victim than a K claimant

Front 31

Shareholder Derivative Suits (SH as Plaintiff)

Back 31

SH is asserting corp's rights rather than his own; recovery in derivative action generally goes to corp rather than to SH bringing action (SH usually gets costs and attorney's fees)

Requirement for bring derivative suit:
1. Stock ownership at particular time
2. Must fairly rep corp's interests
3. Must make written demand on directors that corp bring suit
4. Corp must be joined as D in suit (even though corp's interest)
5. Basis to dismiss - not in corp's best interests (must dismiss if corp's determination was made in good faith by disinterested, independent directors)

Front 32

Shareholder Voting & Proxy

Back 32

Record SH votes - person shown as owner in corp records; record date is voter eligibility cutoff set no more than 60 days before meeting

Corp can't vote treasury stock

Proxy = writing signed by record SH directed to secretary of corp authorizing another to vote shares; good for 11 months unless says otherwise; proxy is irrevocable if coupled with an interest (proxy is person to whom shares have been pledged; corp creditor who extended credit under terms requiring appointment; party to a SH voting agreement)

Front 33

SH Voting Trusts and Agreements

Back 33

Voting Trust:
1. written trust agreement controlling how shares will be voted
2. copy to corp
3. transfer legal title of shares to voting trustee
4. original SHs receive trust certificates and retain all SH rights other than voting

SHs of any corp not listed on national securities exchange or market may enter itno an agreement governing voting, but SH agreeemtns must be approved by all SHs at time of agreement and to be binding on subsequent purchasers, the existence of SH agreement must be conspicuously on front or back of each outstanding share certificate or on the info statement required for uncertificated shares

Front 34

SH Meetings

Back 34

Notice: SH entitled to written notice (when, where, why) between 10-60 days before meeting (21-60 if meeting is to consider fundamental change); waived by SH expressly or impliedly (attends meeting w/out objecting)

SH Quorum: majority of shares entitled to vote (not number of shareholders)

Special Meeting: may be called by SHs of at least 10% of all shares entitled to vote at meeting

Front 35

Stock Transfer Restrictions

Back 35

Valid if it reasonably obligates Sh to purchase shares that are the subject of a SH agreement; reasonableness turns on whether there is an undue restraint on alienation (right of first refusal is OK, assuming corp offers reasonable price)

Even if restriction is reasonable and thus valid, it cannot be invoked against transferee unless it is conspicuously noted on stock certificate or transferee had actual knowledge of restriction

Front 36

SH Right to Inspect Books and Records

Back 36

Anyone who has been SH for at least 6 months immediately preceding his demand or owns at least 5% of the outstanding shares has a right to examine relevant books and records if she makes a written demand state a proper purpose (one reasonably related to one's interest as Sh - gaining info to call special SH meeting to spend board of directors - under TBOC, burden of showing proper purpose is on corporation)

Front 37

Distributions

Back 37

Payments to SHs - can be dividend; to repurchase shares; to redeem shares (forced sale to corp at price set in certificate)

Distributions declared in Board's discretion; no right to a distribution

Funds used for distribution:
1. surplus (assets - liabilities - stated capital = surplus)
2. stated capital can NEVER be sued for distribution; it is the par value of the issuance (excess over par goes into surplus)

Whenever director is in trouble for unlawful distribution, think about directors' defense of good faith reliance (ex. accountant)

Front 38

Characteristics of Fundamental Corporate Change

Back 38

Extraordinary occurrence so Board can't do these alone:
1. board takes an action adopting resolution of fundamental corporate change
2. board submits proposal to SHs with written notice at least 21 days before SH meeting
3. fundamental change must be approved by SHs (2/3 of shares entitled to vote - not just those who actually vote)
4. document delivered to Sec of State for filing

Front 39

Dissenting SH Right of Appraisal

Back 39

Dissenting SH has right to compel the corp to buy his shared for fair value (appraisal remedy) if all corp's assets are being sold outside usual course of business (under TBOC, exists even if sale is within usual course of business); to qualify, SH must:
1. file written notice of objection to the sale before SH vote
2. vote against sale
3. make written demand on corp for a specified fair value within 20 days after being notified that sale has been approved

Corp, within 20 days after receiving demand, must accept SH's valuation or give its own estimate; if they agree on value, corp pays agreed amount within 90 days after sale is approved; if not, SH files suit to have court determine fair value

Front 40

Amendment of Certificate of Formation

Back 40

1. Board of director action
2. SH approval (2/3 entitled to vote)
3. If approved, deliver amended certificate to Sec of State
4. No dissenting SH right of appraisal

Front 41

Merger

Back 41

1. Board of direction action (both corps)
2. SH approval (both corps)
3. No SH approval required if 90% or more owned subsidiary is merged into parent corp (short form merger)
4. If approved, deliver certificate to Sec of State
5. Dissenting SH right of appraisal - available for both corps (even for short form merger)
6. Surviving corp succeeds to all rights/liabilities of the constituent's

Front 42

Conversion

Back 42

Corp can convert to another form of business organization; requires board of directors action and approval by 2/3 of the shares entitled to vote; deliver certificate to Sec of State for filing; dissenting SHs can demand appraisal rights

Front 43

Transfer/Sale of Assets

Back 43

Sale of assets doesn't require SH approval unless the transaction constitutes a sale of all or substantially all of the assets of the corp; if the sale is for all or substantially all of corporate assets, standard fundamental procedure is followed (for selling corporation only):
1. Board must pass resolution that sale be submitted to SHs
2. Board must notify SHs of a SH meeting to consider proposed sale
3. SHs must approve by vote of at least 2/3 of shares entitled to vote (not just majority of those present)
4. Dissenting SHs have appraisal rights (for selling company only)
5. Sale of all assets of corp doesn't make acquirer liable for any obligation of selling corporation

Front 44

Voluntary Termination

Back 44

1. written consent of all SHs OR
2. board of director action and approval by 2/3 of the shares entitled to vote
3. after either of these is met, send notice of intent to wind up to creditors
4. follow the liquidation process
5. court can revoke termination if corp was terminated as a result of fraud