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56 Cards in this Set

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  • Back
Who is a Promoter?
Promoters are persons acting on behalf of a corporation not yet formed.
When does the corporation become liable on the promoter's pre-incorporation contracts?
When the corporation accepts the contract by:
1) Express board resolution
2) By ratifying it
3) Knowledge and acceptance of benefits
The promoter remains liable on pre-incorporation contracts until....
Novation (an agreement between the promoter, the corporation and the other contracting party that the corporation will replace the promoter under the contract)
What happens if the promoter enters into a contract and the corporation is never formed?
The promoter alone is liable.
What happens if the promoter enters into a contract and the corporation merely accepts the contract?
The corporation becomes liable but the promoter is still liable under the novation rule.
What is a subscriber?
Persons or entities who make written offers to buy stock from a corporation not yet formed.

A pre-incorporation suscription offer is irrevocable for 6 months.
Role of incorporators in the corporation formation?
They merely sign and file the articles of incorporation
What are authorized shares?
The maximum number of shares the corporation is authorized to issue.
What is the purpose in the articles of incorporation?
The articles must contain some purpose even if it is just a general purpose.
Effect of activites exceeding the scope of the purpose stated in the articles of incorporation?
1. The State of Kansas may enjoin the ultra-vires activity and even dissolve the corporation.

2. Directors and officers are liable PERSONALLY to the own corporation by the ultra-vires activity.
Who is the agent?
The agent is the corporation's official legal representative and his address and registered office must be in file with the state.
Absolute formation requirements to for a De Jure Corporation, the articles must include:

1. Name of the Corporation
2. Authorized shares
3. Purpose
4. Agent
5. Incorporators
Legal requirement for the corporation's name
The name must contain some indicia of corporate status. i.e. The great steak, Inc.
i.e. The great steak, Corp.
By-laws requirements in Kansas
A bylaw is a rule governing the internal management of an organization, they generally cover topics such as how directors are elected, how meetings of directors and shareholders are conducted, and what officers the organization will have and a description of their duties.

In Kansas, the articles need not contain the by-laws. The shareholders have the power to adopt and amend the by-laws, unless the Articles give the power to the Board.
What is the principle of limited liability for shareholders?
Generally, shareholders are not personally liable for debts of the corporation. The shareholder is liable only for the piece of her stock.
Piercing the corporate veil doctrine
As a general rule a shareholder is not liable for the debts of a corporation, but to avoid fraud and unfairness, the courts will from time to time pierce the corporate veil. Doctrine arises in two situation:
1. Alter ego: parent/subsidiary
2. Failure to observe sufficient corporate formalities
2. Undercapitalization: failure to maintain sufficient funds to cover foreseeable liabilities.
Selling of stock: what does a corporation need to receive when selling stock?
1. Consideration: usually par value which is the minimum issuance price.
No par value means...
No minimum issuance price, (the boards valuation of adequate consideration is conclusive.)
What is treasury stock?
No par stock, treasury stock is stock that was previously issued and had been reacquired by the corporation. It can be re-sold
Acquiring property with par value stock...
Any valid consideration may be received in return of par value stock so long as the board values that consideration to be at least par value.
Consequences of issuing par stock for less than par value
Directors are liable for authorizing a below par issuance.
What are pre-emptive rights?
The right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock.
Statutory requirements for directors
1. Corporations must have a board with at least 1 member
2. Shareholders elect directors
3. Shareholders can remove a director before her term expires with or without cause
4. Action must be taken at a valid meeting
Requirements of a valid meeting
1. Unless all directors consent in writin gto act without a meeting, a meeting is required.
2. Notice to directors' meting can be set in by-laws
3. Quorum: must have a MAJORITY OF ALL DIRECTORS to do business (unless a different percentage is required in by-laws)
4. Vote: to pass a resolution, a majority vote of those present is required.
Duties of directors to the corporation
1. Duty to manage
2. Duty of care (prudent person standard)
3. Duty of loyalty
Describe the duty of care by a director
A director must act with the care of that a prudent person would use with regard to her own business.
Describe the duty of loyalty by a director
A director may not receive an unfair benefit to the detriment of the corporation or its shareholders, unless there has been material disclosure and independent ratification.

Remember: no usurping and no self-dealing.
Indemnification of directors and officers
Will depend on whether he prevailed or lost and whether the action if derivative (actions against the person in relation to corporate activities) or non-derivative (not in the right of the corporation):


1. DERIVATIVE SUITS: Indemnification is limited ONLY TO EXPENSES (inc. attorney's fees) only if acted in good faith and in the corporation's best interests.

2. NON-DERIVATIVE SUITS: May indemnify for expenses, judgments, settlements and costs if acted in good faith and in the best interest of the corporation.


The corp. MUST ALWAYS indemnify expenses and reasonable costs if he wins a lawsuit against any party REGARDLESS OF WHETHER THE SUIT IS DERIVATIVE OR NOT.
What is a derivative suit?
A suit by shareholders to enforce corporate rights against directors or other insiders.

Always ask, could the corp. have brought this suit? If so, it's a derivate suit.
Requirements for bringing a derivate suit?
1. Contemporaneous stock ownership
2. Written demand on directors unless futile.
Where do shareholders vote?
1. Annual meeting
2. Specially noticed meeting
Who has the right to vote at an upcoming meeting where voting occurs?
Only the record date owner. Record date is the voter eligibility cut off date set by the board between 10-60 days in advance of the meeting.
What is shareholder voting by proxy?
A proxy is a (1) wriing, (2) signed by the record shareholder; (3) directed to the secretary of the corp. (4) authorizing another to vote the shares (5) valid for 3 years
Revocability of proxies
Proxies are freely revocable unless:
1) they say conspicuously irrevocable, AND
2) they are coupled with an interest
What is the quorum required at a shareholder meeting?
A quorum requires the majority of outstanding shares, unless otherwise provided in the articles.
Voting by shareholders
If quorum is present, action is approved if a MAJORITY of the shares REPRESENTED at the meeting vote in favor.
How can shareholders increase their influence on voting even when they don't own the majority of shares?
Shareholders who own relatively few voting shares can increase their influence by agreeing to vote alike.
Pooled or block voting methods
1. Voting trusts
2. Shareholder voting agreements
What is voting trust?
A formal delegatin of voting power to a voting trustee.

It has to be (1) written (2) filed with corp. (3) transfer of shares to voting trustee (4) SH's get trust certificates, and (5) shareholders retain all other rights except for voting.
What is a shareholder voting agreement?
Written agreement among shareholders dictating how they will vote their shares.
Voting for directors
General rule, each share is entitled to vote once and the candidates receiving the most votes win.
Cumulative voting
Under cumulative voting, multiply the number of shares times the number of directors to be elected.
Right of shareholders to examine the books and records of the corporation
Any Shareholder shall have access for proper purpose at proper times .
Are to be declared in Board's discretion but the board members are liable fr declaring unlawful dividends that exceed the corporation's capital surplus or net profits.
Priority of Distribution
1. Preferred Shares
2. Participating preferred shares
3. Common stock
Requirements of a close corporation
1. Articles of incorporation must indicate that you are operating as a close corporation
2.Two Thirds of each class of stock must elect to operate as a close corp.
3. There must be some reasonable share transfer restriction i.e. no public trade
Purpose of a Limited Liability Company
The limited liability of a corporatin plus the tax status of a partnership
Requirements to form an LLC
1. Organizers file the Art. of organization
2. Members = shareholders: Managers=Directors
3. Limited life/limited liquidity

So an LLC= ltd liability + lts life = ltd liquidity + ltd tax
Fundamental Corporate Changes
1. Merger: consolidation, dissolution
2. Fundamental: amendment of articles, sale of substantially all of the corporations assets
Fundamental corporate changes procedural steps:
1. Board resolutioin
2. Notice of Special meeting
3. Approval by majority of shares
4. Dissenter right of appraisal
5. File notice w/state
Anti-Fraud Section 10(b) of the Securities and Exchange Act of 1934
1. Scienter -intent to deceive
2. Deception - material misrep. or misappropriation of material nonpublic information.
3. In connection with the actual purchase or sale of securities
When does Section 16(b) Short swing trading profits apply and what happens when it applies?
1. Big corporations
2. Big shot defendant
3. Buying/selling stock within a single 6 month period (short-swing trading.

All profits will be recoverable by the corporation.
Sabanes-Oxley Act
2 requirements:
1) no knowingly false filings; and
2. No benefits during falsehoods or blackout periods.
Dissolution of the corporation and time to bring claims against the corporation
After dissolution a creditor has three years in which to bring claims. If the corp. has assets, the creditor can recover from the corp. If no assets, the former SH's and directors are generally not liable for the corp. debts.
Exception to the general rule of no liability for SH's and directors after the corporation is dissolved
A corporation may not distribute assets to Shareholders if the corporation is insolvent, creditors can hold the directors liable for the amount that was improperly distributed.
De factor merger doctrine
Generally, when one corp. buys the asseets of another corp. the buying corp. does not become liable for the selling corp. debts. But if the transaction was entered into fraudulently to escape liability on existing debts, then the new corp. will be liable.